Statement of Changes in Equity: Lesson Objectives
Statement of Changes in Equity: Lesson Objectives
Statement of Changes in Equity: Lesson Objectives
CHANGES IN
EQUITY
LESSON OBJECTIVES
You have learned that cash is a very important asset. You must use it efficiently and
effectively. Therefore, you should make a careful analysis on where you are going to invest
your cash, it should be on something that will give you value and appropriate return.
As a student, knowledge is your best investment, the reason why you need to value education
and apply whatever you have learned.
As the famous sayings go:
If you think education is expensive, try ignorance. – Jeff Rich
Education is the best weapon that you can use to change the world. – Nelson Mandela
You have learned that Equity is defined as the residual interest in the assets of the entity after
deducting all its liabilities and the amount invested by the owner.
Equity is sometimes called “capital, or proprietorship”.
Statement of Changes in Equity presents the summary of the changes that occurred in the
owner’s equity of the firm in a specific period. It also reflects all the elements that caused
changes in an entity’s equity between two dates of the Statement of Financial Position (SFP).
The SCE of sole proprietorship and partnership is usually affected by the following items:
Withdrawals / Drawings is defined as the amount taken out of the business. It decreases the
amount of O.E.
TEMPORARY DRAWING
Date Particulars P/R DR CR
Month Edward Elric, Drawing Pxxx
xxx Cash or other Assets Pxxx
To record owner’s drawing for
personal use
PERMANENT DRAWING
Date Particulars P/R DR CR
Month Edward Elric, Capital Pxxx
xxx Cash or other Assets Pxxx
To record owner’s permanent
drawing of assets from the business
The following balances of some accounts are presented by Edward Elric Merchandising for the
year ended December 31, 2019 prior to the closing of Income and Expense Summary Account
(IESA). (1) Elric, Capital – P680,000, (2) Elric, Drawing – P 30,000
The IESA for the year ended December 31, 2019 has a credit balance of P128,000 after closing
of revenue and expense accounts. During the year, Elric made an additional investment of
P250,000
CORPORATION
For a corporate entity, the equity of the shareholders may be classified as (1) share capital, (2)
retained earnings, and (3) reserves.
1. SHARE CAPITAL represents the funds contributed by shareholders. It is also the money a
company raises by issuing (1) common or (2) preferred stock.
Share capital is reported by a company on its balance sheet in the shareholder's equity section.
The information may be listed in separate line items depending on the source of the funds. These
usually include a line for common stock, another for preferred stock.
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A company may opt to have more than one public offering after its initial public offering (IPO)
An initial public offering (IPO) refers to the process of offering shares of a private corporation to
the public in a new stock issuance. Public share issuance allows a company to raise capital from
public investors. (you will study this specifically in your Business Finance subject)
DETAILED EXPLANATION OF
KIND OF RESERVES
B. Share Premium represents the excess amount contributed by the shareholders over the par
value. Par value is the minimum issue price of the shares appearing on the face of the
certificate of stock.
Example: A company issues 1,000 shares at a par value of P0.01 per share. The company
actually received P15 per share during an offering. The difference between the par value and
the subscription amount is the share premium.
1000 x P0.01 = P10 per share
P15 – 10 = P5 share premium
C. Revaluation Reserves are most often used when a long-term asset’s market value greatly
fluctuates or is volatile due to currency relationships. This reserve is also used when the fair
market value of a PPE after deducting depreciation or impairment (permanent reduction in
fixed assets) is not equal to the net book value of the asset. (Net book value is original cost
less accumulated depreciation)
Example: Using the Straight-Line Method of Depreciation, the net book value of the
equipment is P50,000 but due to market volatility, the equipment was valued as P55,000.
Therefore, the P5,000 balance will be taken from the Revaluation Reserves.
D. Foreign Currency Translation Reserve: is used to convert the results of a parent company's
foreign subsidiaries to its reporting currency. This is a key part of the financial statement
consolidation process. The steps in this translation process are as follows:
Assume further that on January 1, 2019, the beginning balances of related accounts are as
follows:
Common shares P 6,000,000
Preferred shares 3,000,000
Share premium – ordinary 800,000
Share premium – preferred 700,000
Appropriation for plant expansion 800,000
Appropriation for contingencies 600,000
Retained earnings 3,000,000
During the year, the following transactions affected the equity of the company:
1. Net income for the period amounted to P2,900,000
2. The depreciation of the year 2018 was incorrectly overstated by P300,000
3. Dividends declared and paid amounted to P500,000
4. Additional issuance of 20,000 common shares, P100 par at P120 per share and
10,000 preferred shares, P100 par at P120 per share.
5. Additional appropriations where provided during the year.
Required: Prepare the SCE on December 31, 2019
MARIA AILEEN N. CANDELAZA, LPT BUS S211
JOSE RIZAL UNIVERSITY SHS DEPARTMENT
EDWARD ELRIC COMPANY
STATEMENT OF CHANGES IN EQUITY
FYE DECEMBER 31, 2018
Share Capital Reserves Retained
Earnings
Balances, January 1, 2019 P 9,000,000 P 2,900,000 P 3,000,000
Net income for the period 2,900,000
Correction of prior – period 2014
overstatement of depreciation 300,000
Dividends payment (500,000)
Issuance of 20,000, common shares, 2,000,000 400,000
Par P100 at P120 / shares
Issuance of 20,000, preferred shares, 1,000,000 200,000
Par P100 at P120 / shares
Current appropriation of plant expansion 400,000 (400,000)
Current appropriation of contingencies 300,000 (300,000)
Revaluation increment 500,000
Foreign currency translation gain 100,000
Balances – December 31, 2019 P12,000,000 P4,800,000 P 5,000,000
m
Here are some helpful links for additional learning, make sure to visit these.
https://www.investopedia.com/terms/s/sharecapital.asp
https://www.accountingtools.com/articles/foreign-currency-translation.html
Textbook: Aduana, N. (2017). Fundamentals of Accountancy, Business, and Management 2. Quezon City.
C & E Publishing Inc.
Reference: Rabo, J., Tugas, F., Salendrez, S. (2016). Fundamentals of Accountancy, Business and
Management 2, Quezon City, Philippines. Vibal Publishing
Robles and Empleo (2016). The Intermediate Accounting Vol. 2. Mandaluyong, Philippines
Millennium Books Inc.
Manalo, M. Learning to Succeed with Accounting 2. Quezon City. Phoenix Publishing House Inc.
Statement of Changes in Equity presents the summary of the changes that occurred in the
owner’s equity of the firm in a specific period. It is consisting of Owner’s capital, drawing,
additional investment and the net income or loss of the business. Owner’s drawing has two
types, temporary and permanent. In preparing the SCE, we add the net income and
additional investment, deduct the drawing, or the net loss.
Corporation on the other hand, has three different types of capital namely: Share capital,
retained earnings, and reserves.
Share capital is further divided into two, which is the common and preferred capital.
Reserves has four classification. They are appropriation reserves, share premium,
revaluation reserves, and foreign currency translation reserves.
The Statement of Changes in Equity of a sole proprietorship and partnership has a different
presentation with the corporation.
REFLECTION
Assume further that on January 1, 2019, the beginning balances of related accounts are as
follows:
Common shares P 5,000,000
Preferred shares 1,000,000
Share premium – ordinary 700,000
Share premium – preferred 400,000
Appropriation for plant expansion 600,000
Appropriation for contingencies 500,000
Retained earnings 2,500,000
During the year, the following transactions affected the equity of the company:
1. Net income for the period amounted to P2,000,500
2. The depreciation of the year 2018 was incorrectly overstated by P100,000
3. Dividends declared and paid amounted to P300,000
4. Additional issuance of 15,000 common and preferred shares, P100 par at P110 per
share.
5. Additional appropriations where provided during the year.
Required: Prepare the SCE for corporation on December 31, 2019