How to Report Owners’ Equity - dummies

How to Report Owners’ Equity

By John A. Tracy

External balance sheets report two kinds of ownership accounts: one for capital invested by the owners in the business and one for retained earnings (profit that has not been distributed to shareowners).

Business corporations, limited liability companies, partnerships, and other types of business legal entities can have complex ownership structures. The owners’ equity sections in their balance sheets may report several invested capital accounts — one for each class of ownership interest in the business.

Broadly speaking, the manager faces three basic issues regarding the owners’ equity of the business:

  • Is more capital needed from the owners?

  • Should some capital be returned to the owners?

  • Can and should the business make a cash distribution from profit to the owners and, if so, how much?

The external financial statements are very useful in deciding these key financial management issues. For example, the manager needs to know how much total capital is needed to support the sales level of the business.

The asset turnover ratio equals annual sales revenue divided by total assets. This ratio provides a good touchstone for the amount of capital being used for sales.

The external financial report of a business does not disclose the individual shareowners of the business and the number of shares each person or institution owns. The manager may want to know this information. Any major change in the ownership of the business usually is important information to the manager.