THE STATEMENT OF CHANGES IN EQUITY

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.

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, 2020

2020

Beginning balance P 100,000

Additional
400,000
investments

Total 500,000

Owner's drawings -120,000

Net income 150,000

Balance at

December 31, P 530,000

2020
 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that could be personally withdrawn or as an additional fund to the business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.

 PARTNER US BUSINESS

Statement of Changes in Equity

For the year ended December 31, 2020

Partner 1 Partner 2 Partner 3 Total

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

Partners' drawings (P120,000) (P100,000) (P170,000) (P390,000)

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, 2020 P 353,656 338,280 738,065 1,430,000

Actually, a Partnership Capital Statement has the same structure of a Sole

Proprietorship. However, capital movements are breakdown per partner. Share in the net

income is based on the partnership agreement. If there is no agreement, distribution of net

income is based on capital balances.

The most complex capital structure is the Corporation’s Capital Statement. The Owners

of the Corporation are called stockholders. Stockholders own stocks of a corporation. This

ownership serves as the basis for the dividend. Dividend is the return on the investment of the

stockholders. Stockholders are given certificate of stocks as proof of ownership. Generally, big

companies in the Philippines are composed of corporations. Stocks are usually sold at par
value. Par value is the minimum basis of stockholder’ contribution. Other topics about

corporation will be discussed in higher accounting.

Figure 2.3 illustrates the common structure of Capital Statement of a corporation. Figure 2.3
 CBA CORPORATION

Statement of Changes in Equity

For the year ended December 31, 2020

Common stock - Preferred stock -

Share Retained
100,000 shares 50,000 shares Total
premium earnings
autorized, P100 par authorized, P50 par

Beginning balance P 2,500,000 625,000 500,000 300,000 3,925,000

Issuance of additional
500,000 250,000 250,000 - 1,000,000
shares

Total 3,000,000 875,000 750,000 300,000 4,925,000

Net income - - - 850,000 500,000

Balance at December
P 3,000,000 875,000 750,000 1,150,000 5,425,000
31, 2020

This statement is also known as the Stockholders’ Equity. A corporation has the

following capital structure:

1. Common Stock – also called as ordinary share. Ownership of common stock entitles

the stockholder a voting right in the stockholders’ meeting.

2. Preferred stock – also known as the preference share. Preferred stockholders have

preferential dividend rates and claims over the Common stockholders.

3. Share premium – this account is the excess of payment over the par value of the

stocks, either common or preferred. From the above example, if a stockholder

purchased 1,000 common stock of JTEM Corporation for 150, the share premium is

computed as follows:
 Number of stocks purchased 1,000

Purchased price 150

Total amount paid 150,000

Less: Par value of stock (1,000 @ P100) 100,000

Share premium 50,000

The P100, 000 par value of stock will go to the Common Stock account and the

P50,000 represents additional paid-in capital and will be added to the Share

Premium account.

4. Retained earnings – this account consists of accumulated income or loss of the

company. In other words, this is the part of the equity where net income or net loss

is closed.

Relationship of SFP, SCI and SCE

The Statement of Financial Position cannot be completed without the balance of the

total balance equity. The total balance of equity account cannot be completed without the

balance of the Net income. Figure 2.4 illustrates the relationship of the three statements.
 Figure 2.4

ILOVEYOU COMPANY
ILOVEYOU COMPANY
Statement of Changes in Equity
Statement of Comprehensive Income
For the year ended December 31, 2020

2020
For the year ended December 31, 2020
Beginning balance P 100,000
2020
Additional investments 400,000
Net sales
Total 500,000
1,000,000
Drawings -120,000
Less: Cost of sales 500,000
Net income
Gross profit 500,000
300,000
P
Less: General and operating expenses 200,000
Ending balance
Net income P 300,000 P680,000

ILOVEYOU COMPANY

Statement of Financial Position

As at December 31, 2020

2020

TOTAL ASSETS P 1,000,000

Total liabilities 320,000

Equity 680,000

TOTAL LIABILITIES AND EQUITY P 1,000,000