Unit 3: The Statement of Changes in Equity

Learning Objectives
By the end of the Unit, the student should be able to:

Describe the purpose of Statement of Changes on Equity (also referred herein as SCE or

Capital Statement);
discuss the different forms of business organization;
prepare an SCE for a single proprietorship, partnership and a corporation.

What is the Statement of Changes in Equity?

Statement of Changes in Equity is also known as the Capital Statement. SCE is the

details of Equity account in the Balance Sheet. Accordingly, the balance of the Equity portion

of the Statement of Financial Position must have the same balance with the Statement of

Changes in Equity. SCE shows the movements of the capital account of the owners.

Generally, SCE is composed of capital invested by the owners and net income or net loss of

the company.
Structure of Statement of Changes in Equity
The structure of the Capital Statement varies depending on forms of business
organization.
There are three basic forms of organization namely: 1st Sole Proprietorship, 2nd
Partnership, 3rd Corporation. Sole Proprietorship means the business is owned and
operated by one person, the owner.m Normally, the owner manages and hand-on in
the company’s operation. The structure of the Capital. Statement of a Sole
Proprietorship is presented in Figure 3.1 Figure 3.1 (amounts are assumed)

SINGLE ME PROPRIETOR

Statement of Changes in Equity

For the year ended December 31,

2016

2016

Beginning balance P 100,000

Additional investments 400,000

Total 500,000

Owner's drawings (120,000)

Net income 150,000

Balance at December 31, 2016 P 530,000

The structure of the Capital Statement of a Single Proprietorship is simple. It only shows the following:

1. Beginning investment – the balance of capital balance carried forward from the previous year.

2. Additional investment – some owners invest additional cash or other assets to finance the
operation of their business.

3. Owner’s drawings – are capital withdrawal usually in cash. The owner may withdraw money

or other assets from its business. These drawings are generally for personal use of the owner.

4. Net income or Net loss – as discussed in previous Units, net income or net loss is closed to the
equity account. Income earned will form part of the capital of the owner that could be
personally withdrawn or as an additional fund to the business operation. If it is a net loss, the
equity will suffer for the loss.

Partnership is a form of business organization where two or more persons combine their capital
resources, skills and knowledge to operate a business with a view of earning profit. Examples of
partnership are accounting firms, law firms and engineering firms. The structure of a Partnership Capital
Statement is illustrated in Figure 2.2.

Figure 2.2

PARTNER US BUSINESS

Statement of Changes in Equity

For the year ended December 31, 2016

Parnter 1 Parnter 2 Parnter 3 Total

Beginning balance P 100,000 200,000 300,000 600,000

Partners' drawings (120,000) (100,000) (170,000) (390,000)

Additional investments 250,000 120,000 350,000 720,000

Total 230,000 220,000 480,000 930,000

Share in net income 123,656 118,280 258,065 500,000

Balance at December 31, 2016 P 353,656 338,280 738,065 1,430,000