What Causes a Decrease in Owner's Equity?

by Chris Hamilton

Sole proprietors who do not have stockholders and own their own business include a statement of owner’s equity on their balance sheet in order to determine the overall value of their business, according to the Securities and Exchange Commission (SEC). They can compare their current statement to past statements to determine what caused their equity in the business to decline or appreciate over time.

Considerations

Owner’s equity equals the total assets of a business, defined as property that the business owns, minus its’ liabilities, defined as the payable obligations of the business, according to the SEC. Whether a sole proprietor has declining equity in his business depends on how much his assets decline compared to how much his liabilities increase compared to a previous time period. For example, sole proprietors can pay off many of their loans and still find they have less equity than a previous business year if they don’t sell many products or services.

Liabilities

An increase in business liabilities without a corresponding increase in assets will cause a sole proprietor to have less equity on his current equity statement than on a previous quarterly or annual statement. Current liabilities include an increase in labor costs, interest costs, taxes, the replacement of guaranteed products and accounts payable to suppliers, according to the website Accounting Coach. Long term liabilities, such as money paid on issued bonds, credit cards and bank loans, have the same effect.

Losses

Sole proprietors can have fewer physical assets on their balance sheet compared to a previous time period due to a reduction in stocks of inventory and supplies and fewer accounts receivable due to lower sales volume or customers defaulting on owed payments, according to Accounting Coach. Recessions and depressions can also cause a decrease in owner’s equity by lowering the market value of inventory, capital equipment and real estate that the sole proprietor owns. A diminution of intangible assets, such as trade names, goodwill owed to the business and copyrights due to loss of reputation can have also cause a decrease in total owner’s equity.

Sales

Sole proprietors who withdraw earnings and savings from their business and transfer them to their personal accounts will cause a decrease in the overall equity of their business, according to DWM Bean Counter. The sale of capital equipment, such as machinery and tools, and real estate for less than the business owner paid has the same effect, because the sale lowers the value of assets in the business.

About the Author

Chris Hamilton has been a writer since 2005, specializing in business and legal topics. He contributes to various websites and holds a Bachelor of Science in biology from Virginia Tech.