CHAPTER 3

THE STATEMENT OF CHANGES IN EQUITY

 In the prev. lesson, we learned:

• Income statement elements

• Single-step and multi-step income statement
• Solving accounting problems about the income statement
 Objectives:

• Forms of Business Organizations

• Capital statement for sole proprietorship
• Capital statement for partnership and corporations
• Accounting problems on the capital statement
 Financial Statement also show the results of the management
stewardship of the resources entrusted to it. To meet this objective,
financial statements provide information about an entity’s;

• Assets
• Liabilities
• Equity
• Income and Expenses, including gains and losses.
• Contributions by and Contributions to Owners in their capacity as
owners.
• Cash Flow
 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
the business is owned and operated by one person, the owner.
Normally, the owner manages and hand-on in the company’s operation.

• Beginning Capital – the balance of capital balance carried forward from the previous year.
• Additional investment – some owners invest additional cash or other assets to finance the operation
of their business.
• 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.
• 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withdrawn or as an additional fund to the business operation.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.
• Capital balance at the end of the accounting period (adjusted capital balance)
Beginning Capital
Additional investments
Net income Net Loss
Withdrawals

Ending Capital
 Sample Problem 1.
Recognition Company, a sole proprietorship trading business owned by Jimin Santos,
has been operating successfully for years now. The capital of the owner at the start of
the accounting period, January 1, 20X8, amounted to P2,789,674. During the year, the
owner decided to raise the capital balance by P400,000 worth of additional
investment of cash. The entity enjoyed tremendous sales and reported net income in
the income statement amounting to P789,674. The owner, however, withdrew
P50,000 cash for a personal emergency purpose. No other equity activities have been
noted during the year.

Required: Prepare the entity’s Statement of Changes in Equity for the year ended December 31,
20X8.
 RECOGNITION COMPANY
STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED DECEMBER 31, 20X8

Owner*, Capital, December 31, 20X7 P 2,789,674 a. Heading

i. Name of the Company
Add: Additional investment by the owner 400,000 ii. Name of the Statement
iii. Date of preparation (emphasis on the
Add: Net income 789,674 wording – “for the”
Less: Withdrawals by the owner - 50,000
b. Increases to Equity
Capital, December 31, 20X8 P 3,929,348 i. Net income for the year
ii. Additional investment

c. Decreases to Equity
i. Net loss for the year
ii. Withdrawals by the owner
Problem 1.
ABC Company started the accounting period with a capital balance of P456,000 and
ended the period with a capital balance of P474,000. During the period, the owner
made an additional investment of P10,000 and personal withdrawals of P20,000.
How much is the net income enjoyed or net loss suffered by the company during the
period?

a. P8,000 net income

b. P8,000 net loss
c. P28,000 net income
d. P28,000 net loss
Problem 1. Beginning capital
Add: Addt’l investment
P456,000
10,000
ABC Company started the accounting period Add: Net income ?
with a capital balance of P456,000 and ended Less: Withdrawals 20,000
the period with a capital balance of P474,000. Ending Capital P474,000
During the period, the owner made an
additional investment of P10,000 and
personal withdrawals of P20,000. How much Net income= EC + W – Inv. – BC
is the net income enjoyed or net loss suffered
by the company during the period? Net income= 474,000+20,000
- 10,000-456,000
a. P8,000 net income Net income= P28,000
b. P8,000 net loss
c. P28,000 net income
d. P28,000 net loss
 Partnership
• 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.
• 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.
 LEARNING IS FUN COMPANY
STATEMENT OF CHANGES IN PARTNERS’ EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2020
Jimin Jin Jungkook Total

Capital, January 1, 2020 45,000 24,000 16,000 85,000

Add: Additional contributions 12,000 12,000 10,000 34,000

Add: Net income 31,500 31,500 25,000 88,000

Less: Withdrawals 5,000 10,000 5,000 20,000

Capital, December 31, 2020 83,500 57,500 46,000 187,000

 Corporation
• 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.
 Corporation
• Common Stock – also called as ordinary share. Ownership of common stock
entitles the stockholder a voting right in the stockholders’ meeting.
• Preferred stock – also known as the preference share. Preferred stockholders have
preferential dividend rates and claims over the Common stockholders.
• Share premium – this account is the excess of payment over the par value of the
stocks, either common or preferred.
• 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.
 Knowledge Check
The following balances were retrieved from the records of Juan’s Janitorial Services
for the year ended December 31, 2016:

• Capital, January 1, 2016 P 500,000

• Withdrawals 30,000
• Additional Investments 50,000
• Net Loss 45,000

*Prepare the Statement of Changes in Equity

 JUAN’S JANITORIAL SERVICES
STATEMENT OF CHANGES IN PARTNERS’ EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2016

P 500,000
Juan Capital, January 1, 2016

Add:
Additional Investment 50,000

Sub-total
P 550,000
Less:
Net Loss 2016 P 45,000
Withdrawals for the year 30,000 75,000

Juan, Capital, December 31, 2016 P 475,000

THANK YOU !

Ms. Maine