FUNDAMENTALS IN

ACCOUNTANCY AND
BUSINESS MANAGEMENT II
ACADEMIC SUBJECT:
(GRADE 12 First Semester)

MODULE 3
Statement of Changes in Equity
 Equity- Equity/ Capital is the residual interest of the owners in the assets of the business after
considering all liabilities. It is equal to total assets minus total liabilities.

This account is used to record the original and additional investments of the owner of the business
entity. It is increased by the amount of profit earned during the year or is decreased by a loss. Cash or
other assets that the owner may withdraw from the business ultimately reduce. This account title
bears the name of the owner.

STATEMENT OF CHANGES IN EQUITY

The statement of Changes in Equity or Statement of Owner’s Equity shows the changes in the capital
account due to contribution, withdrawals, and net income or net loss.

Capital is increased by owner contribution and income and decreased by withdrawals and expenses.

All changes, whether increase or decrease to the owner’s interest on the company during the period.
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 SFP. (Haddock, Price, and Fabrina, 2012).

The statement of changes in equity summarizes the changes that occurred in owner’s equity. This
statement is now required statement. Changes in an enterprise’s equity between two balance sheet
dates reflect the increase of decrease in its net assets during the accounting period.

For a sole proprietorship type of business, the Statement of Changes in Equity includes the following
items:
 Capital balance at the start of the accounting period.
 Any additional investments and contributions by the owner.
 Net income enjoyed or net loss suffered by the company.
 Any withdrawals by the owner
 Capital balance at the end of the accounting period (adjusted capital balance).

Different Parts of the Statement of Changes in Equity

1. Heading
i. Name of the Company
ii. Name of the Statement
iii. Date of Preparation (emphasis on the wording- ‘for the’)
2. Increases to Equity
i. Net income for the year
ii. Additional investment
3. Decreases to equity
i. Net Loss for the year
ii. Withdrawal by the owner

Statement of Change in Owner’s Equity for a Single/Sole proprietorships

The “Statement of Owner’s Equity or Statement of Changes in owner’s Equity” summarizes the items
affecting the capital account of a sole/single proprietorship business.

A sole proprietorship’s capital is affected by four items: owner’s contributions, owner’s withdrawals,
income and expenses.
The following are the steps in preparing a statement of Changes in owner’s equity by using the
unadjusted trial balance:

 STEP 1: GATHER THE NEEDED INFORMATION

The statement of changes in Owner’s Equity is prepared second to the Income Statement, Take not,
that the most appropriate source of information in preparing financial statements would be the
adjusted trial balance; however, any report with a complete list of updated accounts may be used.

Malayan Repair Service

Adjusted Trial Balance
December 31, 2018

ACCOUNT TITLE DEBIT CREDIT

Cash ₱10,560
Accounts Receivable ₱25,480
Service Supplies ₱2,350
Furniture and Fixtures ₱85,000
Service Equipment ₱550,000
Accumulated Depreciation ₱93,000
Accounts Payable ₱43,520
Utilities Payable ₱12,480
Loans Payable ₱375,000
Mr. Lopez Capital ₱135,000
Mr. Lopez Drawing ₱5,000
Service Revenue ₱297,740
Rent Expense ₱14,500
Salaries Expense ₱195,000
Taxes and Licenses ₱12,300
Utilities Expense ₱8,750
Service Supplies Expenses ₱1,300
Depreciation Expense ₱46,500
Totals ₱956,740 ₱956,740

 STEP 2: PREPARE THE HEADING

Like any financial statement, the heading is made up of three lines. The first line is the name of the
company. The second line shows the title of the report. In this case, the title is Statement of Change in
Owner’s Equity or simply the Statement of Equity. Any of these titles would be all right. The third line
shows the period covered. The report covers a span of time; hence we use “For the Year Ended” for
the Quarter Ended. For the Month Ended, etc. Some annual financial statements omit the “For the
Year Ended” phrase.

Example:

Malayan Repair Services

Statements of Changes in Equity
For the Year Ended, December 31, 2019

 STEP 3: REPOT CAPITAL AT THE BEGINNING OF THE PERIOD

Report the capital balance at the beginning of the period reported- or the amount at the end of the
previous period.

Remember that the ending balance of the last period is the beginning balance of the current period.

Malayan Repair Services

Statements of Changes in Equity
For the Year Ended, December 31, 2019

Mr. Malayan Capital, January 1, 2019 ₱135,000

 STEP 4: ADD ADDITIONAL CONTRIBUTIONS

Contributions from the owner increases capital, therefore, it must be added to the capital balance.

Malayan Repair Services

Statements of Changes in Equity
For the Year Ended, December 31, 2019

Mr. Malayan Capital ₱135,000

Beginning
Add: Additional Investment ₱30,000

 STEP 5: ADD NET INCOME

Net Income increases capital, therefore it is added to the beginning capital balance. Net income is
equal to all revenues minus all expenses.

Malayan Repair Services

Statements of Changes in Equity
For the Year Ended, December 31, 2019
Mr. Malayan Capital ₱135,000
Beginning
Add: Additional Investment ₱30,000
Net Income ₱19,390 ₱49,390
Total ₱184,390

 STEP 6: DEDUCT OWNER’S WITHDRAWALS

Withdrawals made by the owner is recorded separately from contributions. It can easily found in the
adjusted trial balance as “Owner, Drawings,” “Owner withdrawals”, or any other appropriate account.
Withdrawals decreases capital, therefore it must be deducted to the capital balance.

Malayan Repair Services

Statements of Changes in Equity
For the Year Ended, December 31, 2019
Mr. Malayan Capital Beginning ₱135,000
Add: Additional Investment ₱30,000
Net Income ₱19,390 ₱49,390
Total ₱184,390
Less: Withdrawal ₱5,000
  STEP 7: COMPUTE FOR THE ENDING CAPITAL BALANCE

Compute for the balance of the capital account at the end of the period and draw the lines.

Take note, one horizontal line means that a mathematical operation has been performed. Two
horizontal lines (double-rule) are drawn below the final amount.

Below is an example of Statement of Change in Equity:

Malayan Repair Services

Statements of Changes in Equity
For the Year Ended, December 31, 2019
Mr. Malayan Capital Beginning ₱135,000
Add: Additional Investment ₱30,000
Net Income ₱19,390 ₱49,390
Total ₱184,390
Less: Withdrawal ₱5,000
Mr. Malayan Capital, December 31,2019 ₱179,390

For you to understand more the Statement of Changes in Equity, you must also know the difference
of initial investment and the additional investments and define withdrawals.

Initial Investment refers to the very first investment of the owner to the company.

Additional Investment increases the owner’s equity by adding investments by the owner (Haddock,
Price, and Farina, 2012).
Withdrawals- decreases the owner’s equity by withdrawing assets by the owner (Haddock, Price, and
Farina, 2012).

Distribution of Income- when a company is organized as a corporation, owners (called shareholders)

does not decrease equity by way of withdrawal. Instead, the corporation distributes the income to
the shareholders based on the shares that they have (percentage of ownership of the company).
I. Match Column A with Column B.

COLUMN A COLUMN B

1.It is equal total assets minus total liabilities a. Additional Investment

2. It shows the changes in the capital account due to b. Name of the Company
contribution, withdrawals and net income or net loss.
The first line in the Statement of Changes in Equity c. Initial Investment
3. The very first investment of the owner to the d. Gather the needed
company. information
4. Increases to owner’s equity by adding investments by e. Adjusted Trial Balance
the owner.
5. Increases to owner’s equity without additional f. Net Loss for the year
investment.
6. Decreases to owner’s equity apart from net effect of g. Net Income
revenues and expenses
7. Decrease to equity h. Net Income for the year
8. Increase to equity i. Gross income
9. Decrease in equity aside from withdrawals of the j. Heading
owner
10. This statement is prepared prior to preparation of the k. Withdrawals by the owner
financial statement.
11. The period covered/date of preparation l. Income
12. The first step in the preparation of Statement of m. Equity
Changes in Equity
13. The most appropriate source of information in n. Distribution of income
preparing financial statements
14. It is equal to all revenues minus all expenses o. Statement of Changes in
Equity

II. Fill in the Blanks

A. The steps in preparing the Statement of Changes in Equity: (1) (2)

(3) (4) (5)
(6) (7) .

B. The (8) summarizes the changes, that occurred in owner’s equity.

C. In the case of sole proprietorship, increases in owner’s equity arise form (9)
and (10) during the period.

D. The net amount computed after deducting all your liabilities from your assets are designate as
your (11)

E. The very first investment of the owner to the company is called (12)

F. Increases in owner’s equity without additional investment (13)

G. Decreases to owner’s equity apart from the net effect of revenues and expenses. (14)
or (15)

III. Statement of Changes in Equity Preparation:

Recognition Company, a sole proprietorship trading business owned by Shally Santos has been
operating successfully for years now. The capital of the owner at the start of the accounting period,
January 1, 2019, amounted to Php 2,789,674. During the year, the owner decided to raise the capital
balance by Php 400,000 worth of additional investment of cash. The entity enjoyed tremendous sales
and reported net income in the income statement amounting to Php 789,674. The owner, however,
withdrew Php 50,000 cash for a personal emergency purpose. No other equity activities have been
noted during the year. Prepare the entity’s Statement of Changes in Equity for the year ended
December 31, 2019.