LORD’S ANGELS MONTESSORI SCHOOL, INC.

149 Dahlia St., Alido Hgts. Subd., City of Malolos, Bulacan

Tel. Nos.: (044) 795 – 6312 / 791-2439
E-mail add: lams_shs2016@yahoo.com

Fundamentals of Accountancy, Business and Management Part 2

Module 05 Week 05
I. Title

Statement of Changes in Equity (SoCE)

II. Introduction

We have already finished the discussion on two of the set of financial statements, the Statement of Financial Position and the
Statement of Comprehensive Income. Now, in this module we are going to discuss the Statement of Changes in Equity or SoCE.

III. Objectives

The lesson objectives are the following:

1. Understand the purpose of Statement of Changes in Equity

2. Prepare the SoCE for each form of business organization.
3. Appreciate the presentation of the SoCE for each form of business organization.

IV. Pre-Test

Assets = Liabilities + Equity

1. Describe each of the components of the accounting equation.

2. Why is this equation important in accounting?
3. Why is this equation important for a business?

V. Discussion

Recall our discussion on the module Introduction to Financial Statements. We know that the financial statements are
interconnected. The net income or loss of the company is shown in the statement of comprehensive income. The balance of the
equity will then be reported in the statement of financial position. This part of the module will guide us in the understanding the
statement of changes in equity and how it is used.

Prepare the Prepare the Prepare the Prepare the

Statement of
Income Changes in Equity Balance Cash Flow
Statement Sheet Statement

PURPOSE OF THE STATEMENT OF CHANGES IN EQUITY

The statement of financial position provides the users with the company’s assets, liabilities and equity as of a particular date. The
equity portion in the SFP will show how much is the owner’s claims from the assets after the liabilities are paid. The statement of
Changes of Equity (SoCE) will show the users of the financial information the changes in the equity during the period.

The SoCE is a statement dated “for the period”. The report shows a reconciliation of the beginning and ending balances of the
equity accounts. It summarizes the equity transactions with the owners of the business during the period or year. (Salazar, 2017)

FORMS OF BUSINESS ORGANIZATION

The presentation of SoCE and equity portion of the SFP depends on the business organization. Let us review the types of business
according to its formation.

1
 LORD’S ANGELS MONTESSORI SCHOOL, INC.
149 Dahlia St., Alido Hgts. Subd., City of Malolos, Bulacan
Tel. Nos.: (044) 795 – 6312 / 791-2439
E-mail add: lams_shs2016@yahoo.com

Form Description
Sole Proprietorship  Simplest form of a business organization.
 Only one owner
 The business has no legal personality separate from its owners
 Claim of creditors to the business may extend to the personal asset of the
owner
Partnership o Business is owned by two or more owners called partners
o The partnership has a legal personality separate from its owners.
o The claims of the partnership creditors may extend to the personal assets of
the partners
Corporation  The most complex form of business organization
 It is owned by many owners called stockholders or shareholders1
 Ownership is divided common stocks or shares of stocks
 One shareholder can own many stocks
 Stockholders have limited liability, creditors only have claims on the
corporation’s assets

Before we move forward, please provide the advantages and disadvantages of each type of business organizations.

IMPORTANT: All of the different accounting procedures discussed for a service business or a merchandising business are the same
regardless of the form of organization except on how to account for the Equity which will be discussed in the remainder of this
module.

PREPARATION OF STATEMENT OF CHANGES IN EQUITY

The changes in equity in a business reported in the SoCE are usually composed of owner’s investment, owner’s withdrawals and
results of operations. These are the elements found on the SoCE. Reporting would vary depending on the form of business
organization.

SOLE PROPRIETORSHIP

The SFP and SoCE will present one capital account because there is only one owner. The owner’s equity account usually follows the
naming convention: [owner’s name], Capital. For example, if Ronald Suñiga is the owner of the business the equity account will be
Ronald Suñiga, Capital. Same for drawing account, Ronald Suñiga, Drawing. The drawing account us used by accountants to record
withdrawals form the owner.

1
REPUBLIC ACT No. 11232 or known as Revised Corporation Code of the Philippines was signed into law in February 2019. The new
code allows a one-man corporation. A One-Person Corporation (OPC) is a corporation with a single stockholder, who can only be a
natural person (who must be of legal age), trust or estate. However, this will not be discussed in this module. This is a topic that will
be discussed in higher accounting subjects.
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LORD’S ANGELS MONTESSORI SCHOOL, INC.
149 Dahlia St., Alido Hgts. Subd., City of Malolos, Bulacan
Tel. Nos.: (044) 795 – 6312 / 791-2439
E-mail add: lams_shs2016@yahoo.com

For our illustration, let us use Rein Cleaning Services’ adjusted trial balance for year ended December 31, 2019. The beginning
balance of the owner’s equity account is ₱490,000.

The SoCE of Rein Suñiga would be as follows:

The heading should always include

the name of the company,
description of the statement and the
period covered.

Probably you are asking how did we get the amount that was
invested by the owner. First you can check the ledger
postings on the debit side of the owner’s equity account. Or
in case you are only given the beginning balance you can
compute for the investment. The amount of in the trial
balance shows ₱640,000 and we are told that the beginning
balance is ₱490,000, this means that from the beginning
balance there was an additional ₱150,000 investment.

In showing the details in the SoCE, the investment is added to the beginning balance together with the net income (from the SCI).
The drawing account is then deducted to get the ending balance. (Note: The ending balance shown on the balance sheet will
reflected in the general journal after the closing entries are posted. This will be the beginning balance of the next period.)

The ending capital from the SoCE is presented on the SFP under Liabilities and Owner’s Equity.

PARTNERSHIP

A partnership is owned by two or more individuals called partners. Because there is more than one owner of the business, the
owner’s equity account will also be more than one. Same naming convention will be used for the owner’s equity account and it is
the same with a sole proprietorship, [owner’s name], Capital. This will also be true for the drawings account. For example: if Ariel
Miranda, Aries Miranda and Albert Miranda decided to form a partnership, their capital and drawing accounts would be:

Ariel Miranda, Capital Ariel Miranda, Drawings

Aries Miranda, Capital Aries Miranda, Drawings

3
LORD’S ANGELS MONTESSORI SCHOOL, INC.
149 Dahlia St., Alido Hgts. Subd., City of Malolos, Bulacan
Tel. Nos.: (044) 795 – 6312 / 791-2439
E-mail add: lams_shs2016@yahoo.com

Albert Miranda, Capital Albert Miranda, Drawings

Like in a sole proprietorship, we will also be accounting for the owner’s investment and drawings. This time however, the result of
operations would be distributed according to the partner’s agreement.

Illustration – PARTNERSHIP (Salazar, D. R. (2017). Fundamentals of Accountancy, Business and Management 2. Quezon City: Rex
Bookstore Inc.)

The DEF Partnership was established in 20X0. The partners, Diana, Emina and Fanny have January 1, 20X1 outstanding capital
balances of ₱25,600, ₱43,800 and ₱37,655 respectively. Diana contributed ₱15,000 during 20X1. Emina and Fanny also contribute
₱10,000 each in 20X1. The year-end balance of each partner’s drawings account are as follows: Diana ₱12,000, Emina ₱15,000 and
Fanny ₱14,000.

The partnership reported 20X1 net income of ₱75,650. According to the partnership agreement, the partner’s profit-sharing ratio is
30%, 40% and 30% for Diana, Emina and Fanny.

Prepare the 20X1 SoCE of DEF Partnership.

Solution:

DEF Partnership
Statement of Changes in Partner's Equity
For the year ended December 31, 20X1

Diana, Capital Emina, Capital Fanny, Capital Total

Balance, January 1, 20X1 ₱ 25,600 ₱ 43,800 ₱ 37,655 ₱ 107,055
Add:
Partner's Contributions 15,000 10,000 10,000 35,000
Share in Net Income 22,695 30,260 22,695 75,650
Less:
Drawings (12,000) (15,000) (14,000) (41,000)
Balance, December 31, 20X1 ₱ 51,295 ₱ 69,060 ₱ 56,350 ₱ 176,705

Explanation:

Just like in a sole proprietorship, the computation of the partner’s equity starts with the beginning balance. The partner’s
contribution and the share in net income is added. Withdrawals are then deducted.

Remember that the net income was distributed based on the agreement of the partners. The total net income is multiplied by the
percentage share for each partner, for example Diana have 30% share, so ₱75,650 multiplied by 30%.

Amount of
Partner Net Income % Share Share
Diana 75,650 30% ₱ 22,695
Emina 75,650 40% 30,260
Fanny 75,650 30% 22,695
100% ₱ 75,650

CORPORATION

In 1819, Chief Justice John Marshall defined a corporation as “an artificial being, invisible, intangible, and existing only in
contemplation of law.” This definition is the foundation for the prevailing legal interpretation that a corporation is an entity separate
and distinct from its owners. (Weygandt, Kimmel, & Kieso, 2015)

4
LORD’S ANGELS MONTESSORI SCHOOL, INC.
149 Dahlia St., Alido Hgts. Subd., City of Malolos, Bulacan
Tel. Nos.: (044) 795 – 6312 / 791-2439
E-mail add: lams_shs2016@yahoo.com

A corporation is created by law, and its continued existence depends upon the statutes of the state in which it is incorporated. As a
legal entity, a corporation has most of the rights and privileges of a person. The major exceptions relate to privileges that only a
living person can exercise, such as the right to vote or to hold public office. A corporation is subject to the same duties and
responsibilities as a person. For example, it must abide by the laws, and it must pay taxes. (Weygandt, Kimmel, & Kieso, 2015)

Compared to a sole proprietorship or a partnership, a corporation’s owner, called stockholders, may number to thousands. It is easy
to transfer ownership in a corporation. This results in a fast turnover of owners. “If we maintain one capital account for each
stockholder, we would end up with thousands of capital accounts.” (Salazar, 2017) The number of stockholders will also be an issue
in the distribution of revenues.

This is an excerpt from the Jollibee Foods Corporation

2018 Notes to Financial statements. The company is
authorized to issue 1,450,000,000 shares. As of the
balance sheet date “the total number of shareholders
of the Parent Company is 3,023 and 3,042 as at
December 31, 2018
and 2017, respectively.”

A corporation uses three equity accounts, these are

capital stock, additional paid in capital and retained
earnings. These accounts will represent the three equity transactions namely capital contribution, drawings and accumulation of net
income.

EQUITY TRANSACTIONS SOLE PARTNERSHIPS CORPORATION

CAPITAL CONTRIBUTION
DRAWINGS
INCOME ACCUMULATION
PROPRIETORSHIP
Owner's Equity Partner's Equity Capital Stock
Additional Paid in Capital
Owner's Drawing Partner's Drawing
Owner's Equity Partner's Equity Retained Earnings

A corporation’s stockholder’s equity account is divided into two parts, paid-in capital and retained earnings. The paid in capital
represents the amounts given or will be given to the corporation in exchange for its common stock. A common stock, represented
by a stock certificate, is the ownership right in a corporation. Paid-in capital is composed of capital stock and additional capital
stock. Capital stock represents the par value of the common shares issued. Par value is the minimum amount that a corporation
can issue its stocks to shareholders. If the consideration received in issuing shares is more than its par value, the excess is
considered additional paid-in capital. For example, if the corporation’s common stock’s par value is ₱10 and received ₱12 the
excess ₱2 is considered additional paid in capital and the ₱10 will be recorded as capital stock.

Retained earnings account reports the undistributed earnings of the corporation. The balance of the retained earnings comes from
the net income or net loss and reduced by the dividends distributed from the incorporation of the business up to the date of the
SFP. Dividends are the income of the corporation distributed to the stockholders.

Illustration – CORPORATION (Salazar, D. R. (2017). Fundamentals of Accountancy, Business and Management 2. Quezon City: Rex
Bookstore Inc.)

GHI Incorporated was established in 20X0. The corporation issued 10,000, ₱10 par value shares of stocks at an issue price of ₱20 per
share. On July 15, 20X1, the corporation issued 1,000 new shares at an issue price of ₱25 per share.

The corporation reported net income of ₱56,785 and ₱65,870 in 20X0 and 20X1, respectively. Dividends of ₱2.15 per share on
record as of December 31, 20X0 were declared and distributed to shareholders on February 1, 20X1. There were no dividends
distributed on the first year of operations of the corporation.

Prepare the 20X1 statement of changes in equity of GHI Incorporated in good form.

5
 LORD’S ANGELS MONTESSORI SCHOOL, INC.
149 Dahlia St., Alido Hgts. Subd., City of Malolos, Bulacan
Tel. Nos.: (044) 795 – 6312 / 791-2439
E-mail add: lams_shs2016@yahoo.com

GHI Incorporated
Statement of Changes in Stockholder’s Equity
For the year ended December 31, 20X1

Additional Retained
Capital Stock Paid-in Capital Earnings Total
Balance, January 1, 20X1 ₱ 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 (23,560) (23,560)
Balance, December 31, 20X1 ₱ 110,000 ₱ 115,000 ₱ 99,095 ₱ 324,095

Explanation: The beginning balance is the of the capital stock and additional paid-in capital is the stock issuances during the
incorporation2 of the business. The amount recorded in during the incorporation of the business for capital stock is the par value.
The excess of the issue price from the par value is the additional paid in capital. During the year 20X0 the corporations net income is
₱56,785. Just like in a sole proprietorship and a partnership, the closing entries for corporation is the same except that the final
amount of the income summary is closed to retained earnings. The retained earnings account is a permanent account. During the
year 20X1 the same transaction transpired with capital stock, additional paid-in capital and retained earnings. The only addition for
the reporting period is the issuance of dividends.

Journal Entries for the transactions

Debit Credit
During Incorporation Cash 200,000
20X0 Capital Stock 100,000
Additional Paid-in Capital 100,000

Computation: Number of stocks issued 10,000

Par value 10 100,000

Number of stocks issued 10,000

Amount in excess of par value 10
(₱20 issuance price- ₱10 par value) 100,000
Total consideration recevied 200,000

Debit Credit
Additional Issuance Cash 25,000
20X1 Capital Stock 10,000
Additional Paid-in Capital 15,000

Computation: Number of stocks issued 1,000

Par value 10 10,000

Number of stocks issued 1,000

Amount in excess of par value 15
(₱25 issuance price- ₱10 par value) 15,000
Total consideration received 25,000

Debit Credit

2
Incorporation means the registration of the company with the necessary regulatory agency. The registration is needed to recognize
the legal identity of the corporation. Here in the Philippines, the governing body for corporations is the Securities and Exchange
Commission or commonly known as the SEC.
6
LORD’S ANGELS MONTESSORI SCHOOL, INC.
149 Dahlia St., Alido Hgts. Subd., City of Malolos, Bulacan
Tel. Nos.: (044) 795 – 6312 / 791-2439
E-mail add: lams_shs2016@yahoo.com

Dividends Dividends 23,650

Feb 1, 20x1 Cash 23,650

Computation: Stocks issued as of Dec 31, 20X0 11,000

Dividend per share 2.15
Total Dividends 23,650

References
Ferrer, R. C., & MIllan, Z. V. (2017). Fundamentals of Accountancy, Business and Management Part 2. Baguio City:
Bandolin Enterprise.

Kieso, D., Weygandt, J., & Warfield, T. (2016). Intermediate Accounting 16th Ed. Hoboken NJ: John Wiley & Sons, Inc.

Salazar, D. R. (2017). Fundamentals of Accountancy, Business and Management 2. Quezon City: Rex Bookstore Inc.

Stice, E. K., Stice, J. D., & Skousen, K. F. (2006). Intermediate Accounting 17th ed. South-Western College Pub.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Accounting Principles 12th Edition. US: John Wiley & Sons, Inc.

Prepared by:

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LORD’S ANGELS MONTESSORI SCHOOL, INC.
149 Dahlia St., Alido Hgts. Subd., City of Malolos, Bulacan
Tel. Nos.: (044) 795 – 6312 / 791-2439
E-mail add: lams_shs2016@yahoo.com

Name: _____________________________________________________ FABM2 Module 5

Accountancy Business and Management Grade 12

VI. Assessment

1. Compare and contrast the SoCE for a sole proprietorship, partnership and corporation.
2. Explain the terms: contribution, drawings and accumulation of net income. Why is this important for users of the SoCE?
3. Will you be confident in preparing and SoCE on your own?

Problems

Sole Proprietorship

A. Ms. Caranay opened Creamy Bakeshop on February 15, 2018. She invested ₱75,000 to purchase bakery equipment and
supplies. The bakery earned ₱37,545 net income in 2018. Ms. Caranay used ₱15,000 from the account of the bakery to pay
personal expenses.

On March 16, 2019 and August 18, Ms. Caranay invested additional ₱13,400 and ₱17,650 respectively. Net income for 2019
is ₱48,950. The drawing account has a balance of ₱20,000 at the end of 2019.

Prepare the Creamy Bakeshop statement of changes in equity for the years ending 2018 and 2019 in good form.

B. Gamerz Computer Center is owned and managed by Rein Miranda. The balances of Rein Miranda, Capital at the end of
December 31, 2017 and December 31, 2018 are a ₱765,400 and ₱857,300 respectively. Net income for 2018 is ₱115,465.
No investment has been made during the period. Determine the balance of Rein Miranda, Drawing account on December
31, 2018. Prepare a statement of changes in equity for Gamerz Computer Center in good form.

Partnership

The accounting records of ABC Partnership shows the following:

December 31, 2018

Alice, Capital ₱ 58,960
Bea, Capital 61,200
Chloe, Capital 64,890

The partnership generated ₱75,400 in 2019. According to the partnership contract, the profit and loss sharing ratios are as
follows: Alice (25%), Bea (37.5%) and Chloe (37.5%).

The following were the transactions with the partners during the year.
Alice made additional contribution of ₱7,640.
Nancy withdrew ₱5,000 from the business.
Chloe contributed ₱12,000 but withdrew ₱5,430.

Prepare the partnership SoCE for the year ending December 31, 2019.

Corporation

At the start of the fiscal year, Peanut Butter Corporation has 100,000 shares of its ₱10 par value common stock. The stocks were
initially issued at ₱18 per share. One June 16, the company issued 20,000 shares at ₱20 per share. The corporation has retained
earnings of ₱245,600 at the beginning of the fiscal year. The corporation reported net income of ₱89,540. On September 30, cash
dividends of ₱60,000 were distributed to stockholders.

Prepare a statement of changes in equity for Peanut Butter Corporation for the fiscal year ended October 30, 2017.

Solutions Guide

C:\Users\acer\Documents\001 Ronald v2\03 LAMS\FABM2\FABM2 Module 00 - Introduction to Financial Statements.xlsx