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.

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.
Module in Fundamentals of ABM 2
1st Semester, SY 2020-2021

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.

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

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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, Total

Capital
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 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.

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.

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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
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 ₱2,10
Dividends for 2011 ₱21,000

Exercises

1. On February 1, 2014, Mira Delamar opened a store that sells school supplies. Mira wanted to know
the balance of her capital account. The following were taken from the accounting records of Mira’s
Store:

Mira started her business by depositing P30,000 to open the checking account. On October 15, 2014,
the business is in need of additional cash so Mira deposited P5,000 to the checking account from her
personal account. Mira also withdrew P15,000 from the business over the year. The business earned a
net income of P37,450 for 2014.

Prepare the Statement of Changes in Equity for the year Ended December 31, 2014.

2. In February 15, 2011, Everly Ferrer opened Cookie Fantasy Bakeshop. She invested P75,000 to
purchase an oven and bakery supplies. The business generated a net income of P37,545 in 2011.
Moreover, Everly used P15,000 from the account of Cookie Fantasy to pay the electricity and phone
bills of her house.

Everly invested an additional P13,400 and P17,650 on March 16, 2012 and August 19, 2012,
respectively. Net income for 2012 was reported P48,950. Everly’s Drawings account has a balance of
P20,000 on December 31, 2012.

Prepare a Cookie Fantasy Bakeshop’s Statement of Changes in Equity for the year ended December
31, 2011 and December 31, 2012.

3. The Playdate Kiddie Gym is owned and managed by Cris Roxas. The balance of the Cris Roxas, Capital
is P765,430 and P857,340 on December 31, 2011 and December 31, 2012, respectively. Net income
for 2012 is P115,465. Cris did not make additional contribution to the business in 2012. Determine the
balance of the Cris, Roxas, Drawings account on December 31, 2012.
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4. The following balances of some accounts are presented by YVONEE Trading for the year ended
December 31, 2018 prior to the closing of Income and Expense Summary Account

Net income for the year was P128,000. During the year, YVONNE made an additional investment of
P250,000.

Prepare the statement of changes in equity of YVONNE Trading.

5. The following are taken from the accounting records of MNO Partnership.

December 31, 2013

Mario, Capital P 58,960

Nancy, Capital 63,200

Olga, Capital 64,890

The partnership generated net income of P75,400 in 2014. According to the partnership contract, the
profit and loss sharing ratios are as follows: Mario (25%), Nancy (37.5%), and Olga (37.5%).

The following were transactions with the partners during the year.

● Mario made additional contribution of P7,640.

● Nancy withdrew P5,000 from the business.
● Olga contributed P12,000 but withdrew P5,430.

Prepare the partnership’s statement of changes in equity.

6. The following are taken from the accounting records of JKL Partnership.

December 31, 2013 December 31, 2014

Jamie, Capital P54,900 P64,900
Kristine, Capital 53,200 63,900
Lally, Capital 44,890 50,890
The partnership generated net income of P51,600 in 2014. According to the partnership contract,
Jamie, Kristine and Lally share profit and loss equally. The partnership contract allows each partner
to withdrew P1,000 monthly. Jamie and Kristine each contributed P5,000 during the year. Lally did
not make any contribution during the year.

Required:

a. Prepare the partnership SCE.

b. Determine if any partners violated the partnership contract provision on drawings.

7. The Retained Earnings of PQR, Inc. shows a January 1, 2012 balance of P199,760. The Board of
Directors of PQR Inc. distributed cash dividends of P11,000 to the company’s stockholders. As of
December 31, 2012, the retained earnings reported a balance of P280,990. Determine the PQR’s net
income for 2012.

8. At the start of the fiscal year, STU Company has 100,000 shares of its P10 par value common stock.
The stocks were initially issued at P18 per share. On June 16, the company issued additional 20,000
shares at P20 per share. STU has retained earnings of P246,600 at the beginning of the fiscal year.
The company reported net income of P89,540. On September 30, cash dividend of P60,000 was
distributed to stockholders.

Prepare the SCE for STU Company for the fiscal year ended October 30, 2013.

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Module in Fundamentals of ABM 2
1st Semester, SY 2020-2021

Performance Name Grade Level 12 Score

Task
No. 3 Section Learning Area Fundamentals of ABM 2
1st Semester
2020-2021
Date Topic Statement of Changes
in Equity

Problem 1.

The capital, withdrawal and income summary accounts for Leonila Generales Travel
Agency are shown in T-account form below. Closing entries have been recorded for the
year ended December 31, 2015.

Prepare a Statement of Changes in Equity.

Problem 2

The following financial information is known about these unrelated entities:

Answer the following:

1. Refer to Neo Gomez:

a. What’s the owner’s equity as at Dec. 31, 2014?
b. What’s the owner’s equity as at Dec. 31, 2015?
c. What’s the amount of liabilities as at Dec. 31, 2015?
2. Refer to Ben Cogon:
a. What’s the owner’s equity as at Dec. 31, 2014?
b. What’s the owner’s equity as at Dec. 31, 2015?
c. What’s the profit for 2015?
3. What’s the amount of assets owned by Beatriz Onate as at Dec. 31, 2015?
4. What’s the amount of additional investments in Placido Tuddao made during
2015?

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Problem 3

The accounts for the Statement of Financial Position, Statement of Changes in Equity and
Statement of Comprehensive Income of Alfred Quinsay, CPA, are as follows:

During the year, Quinsay invested additional ₱22,000 in the business.

Prepare the Statement of Comprehensive Income, Statement of Changes in Equity and

Statement of Financial Position.