Lesson 3: Statement of Changes in

Equity
At the end of the lesson, the students will be able to:
1. Understand the purpose of the Statement of Changes in Equity;
2. Appreciate that the presentation of the Statement of Changes in Equity is dependent on the form of business
organization;
3. Identify the elements of the Statement of Changes in Equity;
4. Determine the nature of the different equity accounts used by the corporations; and
5. Prepare a Statement of Changes in Equity

What Is a Statement of Changes in Equity?

Statement of Changes in Equity is prepared to meet the requirements of the readers

to understand the transactions that caused the movements in equity accounts. The SCE is a
statement dated “for the year ended.” The report shows a reconciliation of the beginning and
ending balances of the equity accounts. It summarizes the transactions with the owners of the
business that occurred during the year.

Forms of Business Organization

The business organization determined the presentation of the SCE and equity portion of
the SFP. There are three basic forms of business organizations:
1. Sole proprietorship is the simplest form of a business organization. There is only
one owner referred to as sole proprietor. The business has no legal personality
separate from its owner.
2. Partnership is a business owned by two or more owners called partners. They pool
their resources together such as money, property, and industry, to operate a
business and divide the profit among themselves. Partners are generally involved in
the management if the business. A partnership has a legal personality separate from
its owners. It is taxed separately from the partners except for those formed for the
practice of the profession of the partners. However, the claims of the partnership
creditors may extend to the partners’ personal asset.
3. Corporation is the most complex form of business organization. A corporation is
owned by many owners called stockholders or shareholders. Ownership is divided
into common stocks or shared of stocks. One of the characteristics of a corporation is
the separation of ownership and management. Stockholders have limited liability.
Creditors of corporation only have claims to the corporation’s assets. A corporation is
a legal entity separate from its owners.

Preparation of Statement of Changes in Equity

The form of business organization determined the equity accounts reported on the
financial statements. The form of business organization differs in terms of number of owners
and the transferability of ownership. This inherent characteristic of business organizations led to
the difference in the presentation of equity.

Sole Proprietorship

The SFP and SCE will present one capital account because there in only one owner. The
owner’ capital account follows this naming convention: <Owner’s name>, Capital. Accountants
uses the owner’s Drawings account to record withdrawals of the owner.
Module in Fundamentals of ABM 2
1st Semester, SY 2020-2021

The owner’s Capital account tracks the following transactions of the owner: (1)capital
contributions; (2) withdrawals; and (3) net income or net loss generated by the business.

ABC Company
Statement in Changes in Equity
For the period ended December 31, XXXX

Owner, Capital, January 1, XXXX XXXXX

Add: Net Income XXXXX
Owner's Contribution XXXXX
Less: Drawings XXXXX
Owner, Capital, December 31, XXXX XXXXX

Problem 1. Juana Dela Cruz is the owner of the Friendly Convenience Store. The store was established on January 1, 2010. Juana
deposited P10,000 to a bank account in the name of Friendly Convenience Store. She made three more deposits of P2,500 each during
the year from her personal account. The store generated a net income of P35,670 in 2010. Juana regularly withdraws P1,000 per month
from the store’s bank account for her personal expenses.

1. Determine the 2010 yearend balance of the Juana Dela Cruz, Drawings account.
2. Prepare a Statement of Changes in Equity for the year ended December 31, 2010.

Answer

1. The 2010 year-end balance of the Juana Dela Cruz, Drawing account is ₱12,000. This is computed as ₱1,000 per month for
12 months.
2. Statement of Changes in Equity

Friendly Convenience Store

Statement of Changes in Equity
For the year ended December 31, 2010

Juana Dela Cruz, Capital, January 1, 2010 ₱ 0

Add:
Owner’s Contribution (₱10,000 + ₱7,500) 17,000
Net Income 35,670
Less:
Drawings (₱1,000 x 12) (12,000)
Juana Dela Cruz, Capita, December 31, 2010 ₱41,170

Partnership

A partnership is owned by two or more partners. The number of capital accounts that will
be reported on SCE is equal to number of partners. A Drawing account is also maintained for
each partner.

Net income is allocated based on the profit and loss sharing agreement stipulated in the
partnership contract. Allocation of net income is unique only to partnership.

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Module in Fundamentals of ABM 2
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ABC Partnership
Statement of Chnages in Equity
For the period ended December 31, XXXX

Partner A Partner B Partner C

Capital Capital Capital
Balance, January 1, XXXX XXXX XXXX XXXX
Add:
Net Income XXXX XXXX XXXX
Partner's contribution XXXX XXXX XXXX
Less: Drawings XXXX XXXX XXXX
Balance, December 31, XXXX XXXXX XXXXX XXXXX

Problem 2. The DEF Partnership was established in 2010. The partners Diana, Emina and Fanny have January 1, 2011 outstanding
capital balances of 25,600, P43,800 and P37,655, respectively. Diana contributed P15,000 during 2011. Emina and Fanny also
contributed P10,000 each in 2011. The 2011 year end balances of each partner’s Drawings accounts are as follows: Diana P12,000,
Emina P15,000 and Fanny P14,000.

The partnership reported 2011 net income of P75,650. According to the partnership agreement, the partner’s profit sharing ratio is
30%, 40% and 30% for Diana, Emina and Fanny.

Prepare the 2011 SCE of DEF Partnership.

Answer:

DEF Partnership
Statement of Changes in Equity
For the Year ended December 31, 2010

Diana, Capital Emina, Capital Fanny, Capital Total

Balance, January 1, 2010 ₱25,600 ₱43,800 ₱37,655 ₱107,055
Add:
Partner’s Contributions 15,000 10,000 10,000 35,000
Net Income 22,695 30,260 22,695 75,650
Less:
Drawings (12,000) (15,000) (14,000) (41,000)
Balance, December 31, 2010 ₱51,295 ₱69,060, ₱56,350 ₱176,705

Corporation

A corporation is owned by many stockholders that could number to thousands.

Moreover, the ease of transferring ownership in corporations’ results in fast turnover of owners.
There is no capital account for each shareholder. Accounts that will be used are capital stock,
additional paid in capital and retained earnings. Three equity transactions will also be focused
to: capital contributions, drawings and accumulation of net income.

The stockholders’ equity of a corporation is divided into two parts, namely, paid in
capital and retained earnings. Paid-in capital is the amount of contributions given or will be
given or will be given to the corporation in exchange for its common stocks. Paid-in capital is
composed of capital stock and additional paid-in capital. The balance of Capital Stock reflects
the par value of the issued common shares. Par value is the minimum price by which
corporations can issue stocks to shareholders. However, corporations generally issue stocks in
exchange for an amount greater than par. The excess of the issue price over the par is reported
as Additional Paid-in Capital.

The second half of the stockholders’ equity is the Retained Earnings. This account
reports the undistributed earnings of the corporation. The balance of retained earnings is
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Module in Fundamentals of ABM 2
1st Semester, SY 2020-2021

computed as follows: net income minus net losses and dividends from the date of incorporation
up to the cut-off date or date of SFP. Dividends are distributions to stockholders, similar to
owners’ drawings in sole proprietorship and partnership. Dividends are deducted from retained
earnings because dividends are taken from income generated by the corporation.
ABC Incorporated
Statement of Changes in Equity
For the Period ended December 31, XXXX

Additional
Paid-in Retained
Capital Stock Capital Earnings Total
Balance, January 1 XXXX XXXX XXXX XXXX
Add:
Net Income XXXX XXXX
Issuance of new stocks XXXX XXXX XXXX
Less:
Dividends (XXXX) (XXXX)
Balance, December 31 XXXX XXXX XXXX XXXX

Problem 3. GHI Incorporated was established in 2010. The corporation issued 10,000 P10 par value shares of stock at an issue price
of P20 per share. On July 15, 2011, the corporation issued 1,000 new shares at an issue price of P25 per share.

The corporation reported net income of P56,785 and P65,870 in 2010 and 2011, respectively. Dividends of P2.15 per share were
declared and distributed to shareholders in February 1, 2011. There were no dividends distributed on the first year of operations of the
corporation.

Prepare the 2011 Statement of Changes in Equity of GHI Incorporated.

Answer

GHI Incorporation
Statement of Changes in Equity
For the Year ended December 31, 2011

Capital Stock Additional Paid-in Retained Earnings Total

Capital
Balance, January 1, 2011 ₱ 100,000 ₱ 100,000 ₱ 56,785 ₱ 256,785
Add:
Issuance of Shares 10,000 15,000 25,000
Net Income 65, 870 65,870
Less:
Dividends _________ __________ (21,500) (21,500)
Balance, December 31, 2011 ₱110,000 ₱115,000 ₱101,155 ₱365,155

Computations
1. Capital stock, January 1, 2011
Number of stocks issued as of January 1, 2010 10,000
Par Value ₱10
Capital stock, January 1, 2011 ₱100,000
2. Additional paid in capital, January 1, 2011
Number of stocks issued as of January 1, 2011 10,000
Issue price in excess of par value (₱20-₱10) ₱10
Additional paid-in capital, January 1, 2011 ₱100,000
3. Capital stock, Issuance
Number of stocks issued on July 1, 2011 1,000
Par Value ₱10
Capital stock, issuance ₱10,000
4. Additional paid-in capital, Issuance
Number of stocks issued on July 1, 2011 1,000
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Module in Fundamentals of ABM 2
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Issue price in excess of par value (₱25-₱10) ₱15

Additional paid in capital, issuance ₱15,000
5. Dividends
Number of stocks issued as of February 1, 2011 1,000
Dividend per share ₱2,15
Dividends for 2011 ₱21,500