Department of Education ● Republic of the Philippines

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 3 Statement of Changes in Equity (SCE)
Less
on

What I Need To Know

This lesson discusses the three forms of business organization: single

proprietorship, partnership, and corporation. This lesson also aims to talk about the
unique features as well as the advantages and disadvantages of the aforementioned
business organizations.

At the end of this lesson, you are expected to discuss the different forms of
business organization and prepare a statement of changes in equity of a single/sole
proprietorship.

What I Know

Before starting with this module, let us see what you already know about
Statement of Changes in Equity. Answer the questions below.

Directions. Read and analyze each item carefully. Write the letter corresponding to the best
answer on your answer sheet. 1 point each.

1. Which of the following pertains to a business entity concept?

A. Transactions of a business (as a separate entity) must be distinguished with
transactions of the owners.
B. Transactions of the business (as a separate entity) must be merged with the
transactions of the owners.
C. Revenues are recorded when it is earned.
D. Revenues are recorded when the corresponding cash has been received.

2. Which of the following is a major type of business organization??

A. Sole Proprietorship
B. Partnership
C. Corporations

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 D. All of the above

3. How many is considered owner(s) of a sole proprietorship?

A. One
B. More than one
C. Two but not more than five
D. Five and above
4. How many is/are considered owner(s) in a partnership?
A. One
B. More than one
C. Two but not more than five
D. Five and above

5. How are owners of a sole proprietorship called?

A. Sole proprietors
B. Partners
C. Shareholders/Stockholders
D. None of the above

6. How are owners of a partnership called?

A. Sole proprietors
B. Partners
C. Shareholders/Stockholders
D. None of the above

7. How are owners of a corporation called?

A. Sole proprietors
B. Partners
C. Shareholders/Stockholders
D. None of the above

8. Which of the following sequences arranges the complexity of business

organizations, from simple to complex? A. Partnership, Sole Proprietorship,
Corporation
B. Corporation, Sole proprietorship, Partnership
C. Sole Proprietorship, Corporation, Partnership D. Sole
Proprietorship, Partnership, Corporation

9. Which of the following sequences arranges the complexity of business

organizations, from difficult to the easiest? A. Partnership, Sole Proprietorship,
Corporation
B. Corporation, Partnership, Sole Proprietorship
C. Sole Proprietorship, Corporation, Partnership D. Sole
Proprietorship, Partnership, Corporation

10. Which of the following is the most appropriate business organization for an
entity named “Segismundo, Gomez, Valencia, & Co., CPA’s”?
A. Sole Proprietorship

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 B. Partnership
C. Corporation
D. None of the above
11. Which of the following is most related to the saying “two heads are better than
one”? A. Partnership
B. Sole Proprietorship
C. Corporations
D. None of the above

12. Which of the following are subjected to strict regulations?

A. Sole Proprietorship
B. Partnership
C. Corporations
D. None of the above

13. Which of the following is an advantage of a partnership as compared to a sole

proprietorship? A. Unlimited liability
B. More sources of expertise
C. Concentration of management
D. Limited life

14. Which of the following is a disadvantage of a partnership as compared to a sole

proprietorship? A. Unlimited liability
B. More sources of expertise
C. Concentration of management
D. Limited life

15. Generally, how long is the life of a corporation?

A. 50 years, subject to renewal
B. 50 years, not subject to renewal
C. As long as the life of the oldest shareholder
D. As long as the life of the youngest shareholder

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 What’s In

The end product or output of accounting (financial accounting, to be specific) is useful

financial information. This useful financial information is the “story” that accounting
tells to the interested users. Useful financial information helps the owner to answer the
question, “Should I invest more cash in the business?

Creditors are also guided by this information in answering the question,

“Should we lend more money to the business?”

Financial information is contained and communicated through the financial

statements. Financial statements are like chapters of a novel, telling different stories
of an interrelated subject. Specially, financial statements are organized depictions of
the events that happened in a business. A complete set of financial statements are
composed of the following (IASB 2011):
1. Statement of Financial Position or Balance Sheet
2. Statement of Comprehensive Income or Income Statement
3. Statement of Changes in Equity
4. Statement of Cash Flow

What’s New

To achieve the objectives of this lesson, you must remember to do the following:
✓ Read the lessons carefully.
✓ Follow all directions and given instructions.
✓ Answer all given tests and activities.
✓ Learn to familiarize the following terms:

TERM DEFINITION

Statement of Changes in Equity changes, whether increases or

decreases to the owner’s interest on the
company during the period are reported
here. This statement is prepared prior to
preparation of the Statement of Financial
Position to be able to obtain the ending
balance of the equity to be used in the SFP.
(Haddock, Price, & Farina, 2012).

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Single/Sole Proprietorship All changes, whether increases or
decreases to the owner’s interest on the
company during the period are reported
here. This statement is prepared prior to
preparation of the Statement of Financial
Position to be able to obtain the ending
balance of the equity to be used in the SFP.
(Haddock, Price, & Farina, 2012).

Partnership An entity whose assets, liabilities, income

and expenses are centered or owned by two
or more persons (Haddock, Price, & Farina,
2012).
Corporation An entity whose assets, liabilities, income
and expenses are centered or owned by
itself being a legally separate entity from its
owners. Owners are called shareholders or stockholders
of the company(Haddock,
Price, & Farina, 2012).

Initial Investment The very first investment of the owner to the

company.

Additional Investment Increases to owner’s equity by adding

investments by the owner(Haddock, Price, &
Farina, 2012).

Withdrawal Decreases to owner’s equity by withdrawing

assets by the owner (Haddock, Price, &
Farina, 2012).

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Activity 1.3.1. Identify Me
Presented below are the possible advantages and disadvantages of a sole
proprietorship, partnership, and corporation. Determine on the column the item
pertains to an advantage or disadvantage. In the second column, determine the
related business organization. Item 1 is an example.

Information Advantage or Business

Disadvantage Organization
In the event of bankruptcy, business Disadvantage Sole Proprietorship
creditors can run after the personal assets of Partnership
the owner(s)
Involvement of more persons in the
business; hence more sources of expertise
as compared to the most simple business
organization
Transferability of ownership
Unlimited life
Business organization as a juridical
or separate person
Corporate existence of 50 years, renewable
Most limited source of fund
Most regulated business organization
Double taxation
Limited liability
Unlimited liability

What Is It

Lesson 3.1 Types of Business Organizations

Business entity concept is a prevailing assumption in accounting. It states that

the transactions of the owners (as a separate entity) must be distinguished and
differentiated from the transactions of the owners. Business transactions must be
captured in the financial statements of the reporting entity. Personal transactions, on
the other hand, must be kept in the records of the owners.

There are three major types of business organizations in the Philippines, based
on classification of ownership. These business organizations are sole or single
proprietorship, partnership, and corporation.

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 1. Sole/Single Proprietorship

This is a business organization owned by one person. The owner of the sole
proprietorship is the proprietor. In most cases the proprietor is also the general
manager of a sole proprietorship. As a general manager, he oversees the day-to-day
operations of the sole proprietorship. A sole proprietor is more involved than other
business owners. Sole proprietorships are relatively easy to organize.
Major disadvantages of sole proprietorship include limited source of capital,
proprietor’s unlimited liability, and business entity’s limited existence. The sole
proprietor is the major source of financing available for business. Another major
disadvantage of sole proprietorship is the unlimited liability of the sole proprietor.
Bankruptcy occurs when the sole proprietorship is unable to pay debts. In the
Philippines, in case that the assets of a sole proprietorship are not enough to cover its
existing liabilities, creditors can run after the personal assets of the owner. Lastly, sole
proprietorships have limited life. A sole proprietorship generally co-exists with the sole
proprietor.
Common examples of sole proprietors are stores and individuals rendering
professional services like lawyers, physicians, dentists, and accountants.

2. Partnership

Title lX, Chapter 1 of the Philippine Civil Code defines partnership as a contract
where two or more persons bind themselves to contribute money, property, or industry
to a common fund, with the intention of dividing the profits among themselves. These
persons are called partners. Their agreement is contained in a document called
articles of partnership. The ultimate goal of the partner is to divide the profits among
themselves.
A key advantage of a partnership is the ease of organization, as compared to a
corporation. The contract of partnership may be oral or in writing, as a general rule.
Another advantage of a partnership is the entity’s larger source of capital and
expertise, as compared to a sole proprietorship.
Major disadvantages of partnership include unlimited liability, limited existence,
and mutual agency of the partners. Generally, a partner’s liability in the partnership
can extend to his or her personal properties, similar to a sole proprietorship. However,
the unlimited liability of a partner is subject to exceptions (i.e., the concept of a limited
partner). Partnerships also have limited existence. Generally, any change in the
partnership may dissolve the entity. The most common reason for a partnership’s
dissolution is the death of one partner. Finally, mutual agency may also be a
disadvantage to a partnership. Mutual agency means that each partner may bind the
partnership and the other partner in business related matters. For example, if one
partner obtains a business loan on behalf of the partnership, the partnership and the
other partner are bound by the said loan.
Common examples of partnerships are legal (law) firms and accounting firms.

3. Corporation

The Corporation Code of the Philippines (1980) defines the word corporation
as an “artificial being created by operation of law, having the right word of succession

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and the powers, attributes and properties expressly authorized by law or incident to its
existence.”

Corporation as Artificial Being

In the eyes of the law, a corporation is an artificial being independent of its

owners. A corporation has a name and birth date (incorporation date) just like a normal
person. As an artificial being, a corporation has rights, powers, and attributes. Here is
an example of a right of a corporation: It can acquire its own property. The names,
powers, objectives, and registered address of a corporation are included in a
document called the articles of incorporation.

Owners of a corporation are called stockholders (also called shareholders). Generally,

stockholders have rights to vote, dividends, and new stock issues. Right to vote
pertains to the stockholders ability to participate in the significant decision making
agenda of the corporation through voting. Voting in a corporation is generally
proportional to the number of shares held by the stockholder.

The major advantage of a corporation is the centralization of management through

the board of directors. The board of directors exercises functions over the corporation.
They protect the interest of the stockholders. Another advantage of corporate
organizations is its long existence. Generally, corporations in the Philippines are given
a life of 50 years, subject to renewal. Ownership of a corporation may be inherited by
respective heirs of the original owners. The liabilities of a corporation may not extend
to the stockholders, unlike in sole proprietorship and partnership. Stockholders are
only liable to the extent of their original investment in the corporation.

The major disadvantage of a corporation is its stringent requirements for registration.

Registering a corporate entity in the Philippines will take a significant longer period of
time than organizing a sole proprietorship or partnership. Also, corporations are
subjected to heavy government regulation through the Securities and Exchange
Commission (SEC). Corporations are also subjected to double taxation. The income
of the corporation in itself will be subjected to a corporate income tax of 30%. If the
corporation decides to declare dividends to its stockholders, the dividends are again
subjected to a withholding tax.

Lesson 3.2. Preparation of Statement of Changes in Equity for Sole

Proprietorship

Preparing a statement of changes in equity (SCE) for a sole proprietor is quite

straightforward. The elements of an SCE for a sole proprietorship include the
beginning capital, additional income, net income, and withdrawals.

Sample Statement of Changes in Equity

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 Bimby Food Cart
Statement of Changes in Equity
For the year ended December 31, 2019
Mr. Bimby Equity, Beginning 100,000.00
Add:
Additional Investment 10,000.00
Net Income 25,000.00 35,000.00
Total Equity 135,000.00
Less: Owner’s, Withdrawal (20,000.00)
Mr. Bimby Equity, Ending 115,000.00
========

Figure 1. Sample Statement of Changes in Equity for Sole Proprietorship

Lesson 3.3 Steps in Preparation of Statement of Changes in Equity

1. Draft the heading.

The heading of SCE resembles that of a comprehensive income. This is
because the SCE shows the movement in the capital account of the owner.

2. Determine the beginning balance of capital (equity) The equity beginning is

the operating balance of the owner’s equity account. This is the ending
balance of the equity account of the previous year. In the case above, this
also pertains to the balance as of January 1, 2020 or December 31, 2019.

3. Determine amount of investment (initial or additional)

Additional investment pertains to any capital infusion made by the owner for
the year. For the first year of operation, the SCE should bear the line item
“initial investment”, instead of “additional investment”, which would be used
for the succeeding year of operations. The amount of initial investment can
be traced to the general ledger account or T-account.

4. Determine the amount of the net income

Net income, on the other hand, pertains to the amount earned by the sole
proprietorship for the year. This amount is taken from the statement of
comprehensive income. This is the reason why the statement of
comprehensive income is first constructed before the SCE.

5. Determine the balance of the drawing (withdrawal) account

After net income, drawing is deducted from the balance. This can be done
by referring to the ledger balance or T-account of the withdrawal account.
Drawing represents the owner’s return of investment.

6. Determine the ending balance of the capital or owner’s equity account. After
determining the beginning balance, investment, net income (or net loss),

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 and withdrawal, the accountant will determine the ending balance of the
equity account.
Finally, equity ending represents the equity balance of Mr. Snackstore as of
December 31, 2019.

What’s More

Activity 1.3.2 Compare and Contrast.

1. Compare and contrast sole proprietorship and partnership.

___________________________________________________________
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_________________________________________________ .

2. Compare and contrast partnership and corporation.

___________________________________________________________
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_________________________________________________ .

3. Compare and contrast corporation and sole proprietorship.

___________________________________________________________
___________________________________________________________
___________________________________________________________
___________________________________________________________
___________________________________________________________
___________________________________________________________
_________________________________________________ .

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4. Briefly discuss the elements or sections of the Statement of Changes in
Equity.
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___________________________________________________________
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___________________________________________________________
___________________________________________________________
________________________________________________ .

5. If you are to put-up your own business someday, what type of business
organization are you going to choose? Support your answer.
___________________________________________________________
___________________________________________________________
___________________________________________________________
___________________________________________________________
___________________________________________________________
___________________________________________________________
___________________________________________________________
_________________________________________________

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 What I Have Learned

Activity 1.3.3 Outline Me

Instruction: Make an outline of the advantages and disadvantages of a sole

proprietorship, partnership, and corporation. Provide at least 3 in each form of
business organization.

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 What I Can Do

Activity 1.3.4. Solving the Problem

Case #1. Limbaco Law Firm

Limbaco Law Firm is owned by Atty. Allan Limbaco. The balance of his capital as of
January 1, 2019 is P 1,800,000.00. During the year, he invested an additional cash of
P 450,000.00 in the business. Also, Limbaco Law Firm earned P 168,750.00 of net
income. Finally, he withdraws P 112,500.00.

1. How much is the balance of Atty. Limbaco’s capital as of December 31, 2019?
2. Prepare a Statement of Changes in Owner’s Equity for Limbaco Law Firm.

Activity 1.3.5. Solving the Problem

Case #2. Jalagat Medical Clinic

Jalagat Medical Clinic is owned by Dr. Ana Jalagat. The balance of Dr. Jagalat’s capital
is P 400,000.00 as of January 1, 2019. During the year, she invested an additional P
100,000.00 in the business. Also, Jalagat Medical Clinic earned P 37,500.00 of net
income. Finally, she withdraws P 25,000.00 for personal use.

1. How much is the balance of Dr. Jalagat’s capital balance as of December 31,
2019?
2. Prepare a Statement of Changes in Owner’s Equity for Jalagat Medical Clinic.

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Activity 1.3.6 Choosing the Right One.
Now, that you are finished accomplishing the module, let us check what you have
learned. Answer the questions given below by encircling the letter of the correct
answer.

1. Which of the following pertains to a business entity concept?

A. Transactions of a business (as a separate entity) must be distinguished with
transactions of the owners.
B. Transactions of the business (as a separate entity) must be merged with the
transactions of the owners.
C. Revenues are recorded when it is earned.
D. Revenues are recorded when the corresponding cash has been received.

2. Which of the following is a major type of business organization??

A. Sole Proprietorship
B. Partnership
C. Corporations
D. All of the above

3. How many is considered owner(s) of a sole proprietorship?

A. One
B. More than one
C. Two but not more than five
D. Five and above

4. How many is/are considered owner(s) in a partnership?

A. One
B. More than one
C. Two but not more than five
D. Five and above

5. How are owners of a sole proprietorship called?

A. Sole proprietors
B. Partners
C. Shareholders/Stockholders
D. None of the above

6. How are owners of a partnership called?

A. Sole proprietors
B. Partners
C. Shareholders/Stockholders
D. None of the above

7. How are owners of a corporation called?

A. Sole proprietors
B. Partners
C. Shareholders/Stockholders
D. None of the above

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8. Which of the following sequences arranges the complexity of business
organizations, from simple to complex? A. Partnership, Sole Proprietorship,
Corporation
B. Corporation, Sole proprietorship, Partnership
C. Sole Proprietorship, Corporation, Partnership D. Sole
Proprietorship, Partnership, Corporation

9. Which of the following sequences arranges the complexity of business

organizations, from difficult to the easiest? A. Partnership, Sole Proprietorship,
Corporation
B. Corporation, Partnership, Sole Proprietorship
C. Sole Proprietorship, Corporation, Partnership
D. Sole Proprietorship, Partnership, Corporation

10. Which of the following is the most appropriate business organization for an
entity named “Segismundo, Gomez, Valencia, & Co., CPA’s”?
A. Sole Proprietorship
B. Partnership
C. Corporation
D. None of the above

11. Which of the following is most related to the saying “two heads are better than
one”? A. Partnership
B. Sole Proprietorship
C. Corporations
D. None of the above

12. Which of the following are subjected to strict regulations?

A. Sole Proprietorship
B. Partnership
C. Corporations
D. None of the above

13. Which of the following is an advantage of a partnership as compared to a sole

proprietorship? A. Unlimited liability
B. More sources of expertise
C. Concentration of management
D. Limited life

14. Which of the following is a disadvantage of a partnership as compared to a sole

proprietorship? A. Unlimited liability
B. More sources of expertise
C. Concentration of management
D. Limited life

15. Generally, how long is the life of a corporation?

A. 50 years, subject to renewal

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 B. 50 years, not subject to renewal
C. As long as the life of the oldest shareholder
D. As long as the life of the youngest shareholder

Congratulations! You have just finished Lesson 3 of this module.

References

Arganda, A. M. (2016). Fundamentals of Accounting Bookkeeping 1. Anvil Publishing,

Inc.
Josefina L. Beticon, J. C. (2017). Fundamentals of Accountancy, Business and
Management 2 - Teacher's Manual. Vibal Group. Inc.
Reyes, V. D. (2017). Fundamentals of Accountancy, Business and Management 2.
GIC Enterprises & Co., Inc.
Salazar, D. R. (2017). Fundamentals of Accountancy, Business and Management 2.
Rex Bookstore.

Additional References:

Teacher’s Guide in Fundamentals of Accountancy, Business and Management 2

https://edge.pse.com.ph/openDiscViewer.do?edge_no=5b3feb584ad68ec41db82e3
77ee70f3b)

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