Question

Alternative Forms of Equity LO2-7 BRIEF EXERCISE 2.10 Articulation of Financial Statements Ben Washington, sole owner of Washington Mattress Company, has an ownership interest in the company of $50,000 at January 1. current year. During that year, he invests an additional $20.000 in the company and the company reports a net income of $25,000. Determine the balance of owner's equity that will appear in the statement of financial position at the end of the year, and explain how the amount of net income articulates with that figure in the balance sheet. connort

Answer 1

Owner's equity is the amount that belongs to the owners of the business as shown on the capital side of the balance sheet and the examples include common stock and preferred stock, retained earnings. accumulated profits, general reserves and other reserves, etc.

Hence in the current scenario. balance of owner's equity = 50,000 $ + 20,000 $ (Additional capital raised) + 25,000 $ (Profit of current year) = 95,000 $

In the above definition, accumulated profits refer to the current year profits as well as the past year profits which have accumulated over the years in Reserves and Surplus. Hence amount of net income during the year is added to Reserves & Surplus in the balance sheet which forms a part of the owner's equity balance.