Chapter 3: Statement in Changes in Equity

Statement in Changes in Equity is prepared to meet the requirements of the readers to understand the
transactions that caused the movements in equity accounts.

The SoCE 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 equity transactions with the owners of
the business that occurred during the year.

Forms of Business Organization

Sole Proprietorship

 simplest form of business organization.

 one owner
 the business has no legal personality separate from its owner
 the business and the owner is one entity
 the claim of the creditors of the business extend to the personal assets of the owner
 raising capital for the business is constrained to the owner’s resources and credit standing.

Partnership

 owned by two or more owners

 they pool their resources together to operate a business
 the profit is divided among them
 partners are generally involved in the management
 partnership agreement
 has a legal personality separate from its owner.
 the claims of the partnership creditors may extend to the partners’ personal assets.

Corporation

 most complex from of business organization

 owned by many owners (Stockholders and shareholders)
 ownership is divided into common stocks and shares of stock
 one shareholders can own many stocks
 shareholders are normally involved in the day to day operations of the corporation
 By Laws / Articles of Incorporation
 Corporation Code governs all corporations in the Philippines
 registered in the Securities and Exchange Commission (SEC)
 Philippine Stock Exchange (PSE) – provides platform where investors can buy and sell stocks of
listed corporations.
 Separation from ownership and management
 Professional managers
 creditors of corporation only have claims to the corporation’s assets
 legal separate entity from its owner
Preparation of Statement of Changes in Equity

Sole Proprietorship

DEF Company
Statement of Changes in Equity
For the period ended December 31, 20X1

Owner, Capital, January 1, 20X1 xxx

Add: Net Income xxx
Owner’s contribution xxx
Less: Drawings xxx
Owner, Capital, December 31,20X1 xxx

Accounts payable xxx

Notes payable xxx
Total liabilities xxx

Owner, capital xxx

Total liabilities and owner’s equity xxx
Liabilities and Equity portion of the Statement of Financial Position

Example:

Tina, owner of the Kadamay Convenience Store established the store January 1, 2016.
Tina deposited P 10,000 in the bank account under the name of her store. She made another 2 deposits
of P1,500 each during the year from her personal account. The store generated net income of P26,560
in 2016. Tina withdraws P600 every month from the store’s bank account for her personal use.

Requirements:

a. Compute for the 2016 year-end balance of Tina Drawings Account.

b. Prepare a Statement of changes in equity for the year- ended December 31, 2016.

Answer:

a. Tina, Drawing account P7,200 = (600 per month * 12 months)

b.

Kadamay Convenience Store

Statement of Changes in Equity
For the period ended December 31, 2016

Owner, Capital, January 1, 2016 0

Add: Net Income 26,560
Owner’s contribution (10,000+3,000) 13,000
Less: Drawings (600*12) 7,200
Owner, Capital, December 31,2016 32,360

Partnership

Kadamay Partnership
Statement of Changes in Equity
For the period ended December 31, 20X1

Partner Partner Partner

Total
A B C
Balance, January 1, 20X1 xxx xxx xxx xxx
Add:
Net income xxx xxx xxx xxx
Partner’s contribution xxx xxx xxx xxx

Less:
Drawings xxx xxx xxx xxx
Balance, December 31, 20X1 xxx xxx xxx xxx

Accounts payable xxx

Accrued expenses xxx
Notes payable xxx
Total Liabilities xxx

Partner A, capital xxx

Partner B, Capital xxx
Partner C, Capital xxx
Total owner’s equity xxx
Total liabilities and owners’ equity xxx
Liabilities and Owners’ Equity portion of the Balance sheet
Corporation

Two parts

 Paid-in Capital – the amount of contribution given or will be given to the corporation in
exchange for its common stocks.
- is composed of capital stock and additional paid-in capital.

Capital Stock reflects the par value of the issued common shares.

Par value - is the minimum piece by which corporations can issue stocks to shareholders.

Additional Paid-In capital – excess of the issue price over the par

 Retained Earnings – reports the undistributed earnings of the corporation.

Balance of the retained earnings is computed as:
Net income Less Net losses and dividends from the date of incorporation up to the cut-
off date of SFP.

Dividends – distributions to stockholders (similar to drawing in sole proprietorship and

partnership).

*There are various kinds of dividends. Cash dividends is the term used when the distribution
to shareholders are in cash. Property dividends means that the shareholders will be given
non-cash assets of the corporation. Stock dividends mean that the corporation’s own stocks
will be distributed to the shareholders.

- Dividends are deducted from retained earnings because dividends are taken from
income generated by the corporation.

*The Corporation Code provides that a corporation cannot distribute dividends from
paid-in capital. This implies that dividends maybe distributed only from accumulated
earnings.
 Kadamay Corporation
Statement of Changes in Equity
For the period ended December 31, 20X1

Additional
Capital Retained
Paid-in Total
Stock Earnings
Capital
Balance, January 1, 20X1 xxx xxx xxx xxx
Add:
Net income xxx xxx
Issuance of new stocks xxx xxx xxx

Less:
Dividends xxx (xxx)
Balance, December 31, 20X1 xxx xxx xxx xxx

Accounts payable xxx

Accrued expenses xxx
Notes payable xxx
Total Liabilities xxx

Capital stocks xxx

Additional Paid-In capital xxx
Retained Earnings xxx
Total Stockholders’ equity xxx
Total liabilities and Stockholders’ equity xxx
Liabilities and Stockholders’ Equity portion of the Balance sheet

Example:

Kadamay Corporation 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 P2.10 per share were declared and distributed to shareholders on 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 Kadamay Corporation.

 Kadamay Corporation
Statement of Changes in Equity
For the period ended December 31, 20X1

Additional
Capital Retained
Paid-in Total
Stock Earnings
Capital
Balance, January 1, 2011 100,000 100,000 56,785 256,785
Add:
Net income 65,870 65,870
Issuance of new stocks 10,000 15,000 25,000

Less:
Dividends 21,000 (21,000)
Balance, December 31, 2011 110,000 115,000 101,655 326,655

Computations:

1. Capital stock. January 1, 2011

Number of stocks issued as of January 1, 2011 10,000

Par value P10
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 (P20-P10) P10
Additional Paid-In Capital, January 1, 2011 100,000

3. Capital Stocks, Issuance

Number of stocks issued as of July 1, 2011 1,000

Par value P10
Capital stock, Issuance 10,000

4. Additional Paid-In capital, Issuance

Number of stocks issued as of July 1, 2011 1,000

Issue price in excess of par value (P25-P10) P15
Additional Paid-In capital, issuance 15,000
5. Dividends

Number of stocks issued as of February 1, 2011 1,000

Dividends per share P2.10
Dividends for 2011 21,000