Fundamentals of Accountancy, Business, and Management 2

Statement of Changes in Equity (SCE)

Course Description: The course deals with the preparation and analysis of financial
statements of a service business and merchandising business using horizontal and
vertical analyses and financial ratios. Knowledge and skills in the analysis of financial
statements will aid the future entrepreneurs in making sound economic decisions.

Content Standards
The learners demonstrate an understanding of account titles under the assets,
liabilities, and capital accounts of the Statement of Financial Position, namely,
cash, receivables, inventories, prepaid expenses, property, plant and
equipment, payables, accrued expenses, unearned income, long-term
liabilities and capital that will equip him / her in the preparation of the SFP
using the report form and account form.

Performance Standards
The learners shall be able to solve exercises and problems that require
preparation of an SFP for a single/sole proprietorship with proper classification
of accounts as current and noncurrent using the report form and the account
form.

INSTRUCTION/DELIVERY (130 MINS)

1. Define the term Statement of Changes in Equity and differentiate the forms of businesses (single/ sole
proprietorship, partnership and corporation)

STATEMENT OF CHANGES IN EQUITY – 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.

SINGLE/SOLE PROPRIETORSHIP –An entity whose assets, liabilities, income and expenses are
centered or owned by only one person
PARTNERSHIP – An entity whose assets, liabilities, income and expenses are centered or owned by two
or more persons.
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.

2. Sample of Statement of Changes in Equity (SCE).

 LEARNING IS FUN COMPANY
STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2019

Owner's, Capital, January 1, 2019 P 100,000.00

Add:
Net Income for the year 2019 P 50,000.00
Additional Investment 25,000.00 75,000.00
Sub-total 175,000.00
Less: Withdrawals for the year 30,000.00
Owner's, Capital, December 31, 2019 P 145,000.00

1. Differentiate the initial investment from the additional investments and define withdrawals
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.
Withdrawals –Decreases to owner’s equity by withdrawing assets by the owner.

*Distribution of Income – When a company is organized as a corporation, owners (called

shareholders) do 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).

4. The different parts of the Statement of Changes in Equity

a. Heading
i. Name of the Company
ii. Name of the Statement
iii. Date of preparation (emphasis on the wording – “for the”)
b. Increases to Equity
i. Net income for the year
ii. Additional investment
c. Decreases to Equity
i. Net loss for the year
ii. Withdrawals by the owner
5.Statement of Changes in Equity of a Partnership and a Corporation
The Statement of Changes in Partners’ Equity is used by a partnerships instead of the Statement of
Changes in Owner’s Equity.
The differences between the two are as follows:
a. Title – instead of owner’s, partners’ is used to denote that this is a partnership
b. There are two or more owners in a partnership thus, the changes in the capital account of each partner
is presented
c. The net income is divided between partners (not always equal. Based on the agreement.
Example: (60:40, 40:60, etc.)

The Statement of Changes in Shareholders’ Equity is used by a corporation instead of the Statement of
Changes in Owner’s Equity.
The differences between the two are as follows:
a. Title – instead of owner’s, shareholders’ is used to denote that this is a corporation
b. There are an unlimited number of shareholders but unlike the partnership, the names of the
shareholders are not indicated here. Instead, the corporation keeps an official list with the corporate
secretary
c. The capital account is called share capital (just like owner’s being shareholders)
d. Instead of additional investment, share issuances (happens when shares are sold to shareholders)
increases the share capital of a corporation
e. Instead of withdrawals, distribution of net income to shareholders decreases the Capital of the
corporation

PRACTICE:
1. Which form of business organization puts the least risk on its owners?
2. Which form of business organization is owned by only one peson?
3. Increase in owner’s equity without additional investment.
4. Decrease to owner’s equity apart from net effect of revenues and expenses.
5. Beginning owner’s equity amounted to P300,000. Net loss for the year totaled P45,000. No
 additional investments and withdrawals for the period. Compute for total increase in equity for
the year.
6. Ending owner’s equity amounted to P70,000. Additional investments during the year amounted to
P30,000. Withdrawals totaled P50,000. Compute for the company’s net income for the year
assuming beginning equity is P10,000.

ENRICHMENT (30 MINS)

How a company can earn a lot, have numerous assets and yet have very small equities. This is a
common mistake of most people. They focus on increasing their income (salary) and assets
(house, car, appliances) but at the same time they also increase their liabilities (buying using
loans, debts). This results to low levels or even negative amounts of equity over their
properties.

EVALUATION (30 MINS)

1 quiz: Prepare an SCE.
1. Decreases in equity aside from withdrawals of the owners
2. A type of business that is owned by at least 2 persons.
3. Owner, Juan invested an initial capital amounting P50,000 in order to put up his janitorial
services company. During the first year of operations (2018), the company had a loss of
P25,000. Because of this, Juan invested additional capital amounting to P50,000 in 2019. In
the second year (2019), the company had a net income of P100,000 and Juan withdrew
P10,000 for personal use. Compute for the ending capital balance of Juan for the year 2019.
4. Owner Juana invested P100,000 to start her laundry business. During the first year of
operations (2018), the company had a net income of P15,000. Juana invested additional
P100,000 to grow the business. In 2019, the business earned P50,000. As of December 31,
2019, Juana’s capital balance is P200,000. How much is Juana’s withdrawal?