How is the Statement of Owner's Equity prepared for a sole proprietorship?

• A. Starts with ending owner's equity, then subtracts investments and net income.
• B. Begins with ending owner's equity, adds investments and net income, subtracts withdrawals.
• C. Starts with beginning owner's equity, adds investments and net income, subtracts withdrawals to arrive at ending.
• D. Begins with zero equity and adds only investments.

Answer: (C)

In the statement of owner's equity for a sole proprietorship, you show how the owner’s stake changes over the period. You start with the beginning owner’s equity, add any investments (capital contributions) and the net income earned, and subtract withdrawals (draws) taken by the owner. This sequence produces the ending owner’s equity.

This approach is why the correct method starts with beginning equity, then adds investments and net income, and subtracts withdrawals to arrive at ending equity. Starting from the ending balance would be circular since the ending balance isn’t known until you’ve accounted for additions and withdrawals, and starting from zero ignores the prior period’s balance.