Fundamentals of

Accountancy,
Business and
Prepared

Management 2
by: Jan
Bragas
Bryle A.

John Spencer C.
Statement of
Changes in
Equity
(SCE)
Equity/Capital
• Is the residual interest of the owners in the
assets of the business after considering all
liabilities. It is equal to total assets minus
total liabilities.
• This account is used to record the original
and additional investments of the owner of
the business entity.
Statement of Changes in
• shows
Equity the changes in the capital account due
to contribution, withdrawals, and net income
or net loss.
• summarizes the changes that occurred in
owner’s equity.
• also know as Partner's Share
Equity, Stakeholders Equity or
Owner's Capital
Parts of Statement of
1. Heading
Changes in Equity
i. Name of the Company
ii. Name of the Statement
iii. Date of Preparation
2. Increase to Equity
i. Net Income for the year
ii. Additional Investment
3. Decrease to Equity
i. Net loss for the year
ii. Withdrawals by the Owners
 Types of
Organization
1. Sole/Single Proprietorship
This is a business organization owned by one
person. The owner of proprietorship is the
proprietor. In most cases the proprietor is also the
general manager of sole proprietorship. As a
general manager, he oversees the day-to-day
operations of the sole proprietorship. A sole
proprietorship is more involved than other
business owners. Sole proprietorship are
relatively easy to organize.
 Common examples of sole proprietors are stores
and individuals rendering professional services like
lawyers, physicians, dentists, and accountants.
Advantages:
• Full control
• Quick Decisions
• Easy to form
• Effort-Reward Relationship
Disadvantages:
• Limited source of capital
• Proprietor's unlimited liability
• Business entity's limited existence
• Unlimited liability
2. Partnership
A contract where two or more persons bind
themselves to contribute money, property, or
industry to a common fund, with the intention of
dividing the profits among themselves. These
persons are called partners. Their agreement is
contained in a document called articles of
partnership. The ultimate goal of the partner is to
divide the profits among themselves.
Advantages:
• Ease of organization
• Mutual agency of the partners
Disadvantages:
• Unlimited liability, limited existence, entity's
larger source of capital and expertise.
Mutual agency
Means that each partner may bind the
partnership and the other partner in business
related matters.
For example, if one partner obtains a business
loan on behalf of the partnership, the partnership
and the other partner are bound by the said loan.
3. Corporation
The Corporation Code of the Philippines (1980)
defines the word corporation as an "artificial
being created by operation of law, having the
right word of succession and the powers,
attributes and properties expressly authorized by
law or incident to its existence."

Owners of a corporation are called stockholders

(also called shareholders).
3. Corporation
Generally, stockholders have rights to vote,
dividends, and new stock issues. Right to vote
pertains to the stockholders ability to participate in
the significant decision making agenda of the
corporation through voting. Voting in a corporation
is generally proportional to the number of shares
held by the stockholders.
Advantages:
• Centralization of management through the board
of directors.
• Long existence. – 50 years.
Disadvantages:
• Stringent requirements for registration.
• Heavy government regulation through the
Securities and Exchange Commission (SEC)
• Double taxation
Variations in the
Statement of
Changes in
Bus Organization Ownership
• Single proprietorship • Sole proprietor
• Partnership • Partners
• Corporation • Shareholder
Statement of Changes in
• Statement of Changes in Owner's Equity
Equity
• Statement of Changes in Partners' Equity
• Statement of Changes in Shareholders Equity
A. Statement of Changes in
This statement
Owner's Equity refers the movement and changes
of the capital of the single proprietor in the year of
operation.
B. Statement of Changes in
Movement or changes
Partners' Equity in the capitalization/equity
of the partners are shown in this statement. The
difference between the Statement of Changes in
Owner's Equity against Statement of Changes in
Partners' Equity are as follows:
i. Title — instead of owner's, partners' is used to
denote that this is a partnership.
ii. There are two or more owners in a partnership this,
the changes in the capital account of each partner is
presented.
iii. The net income is divided between partner. It could
be based on the agreement among partners.
Example: 50:50 or 40:60, etc.)
C. Statement of Changes in
Is used in a corporation
Shareholders Equity to show the flow of
change in its equity.
The difference between this two are as follows:
1. Title — instead of owner's, shareholders' is
used to denote that this is a corporation.
2. There are unlimited number of shareholders
but unlike the partnership, the names of the
shareholders are not indicated here. Instead, the
corporation keeps an official list with the corporate
secretary.
3. The capital account is called share capital.
4. Instead of additional investment, share
issuances increase the share capital of a
corporation.
5. Instead of withdrawals, distribution of net
income to shareholders decrease the Capital of the
corporation.
 Steps in
Preparation of
Statement of
C. Statement of Changes in Owner's
Equity for a Single/Sole
Proprietorships
The "Statement of Owner's Equity orThe “Statement
of Owner’s Equity or Statement of Changes in Owner’s
Equity” summarizes the items affecting the capital
account of a sole/single proprietorship business.

A sole proprietorship’s capital is affected by four

items: owner’s contributions, owner’s withdrawals,
income and expenses.
The following are the steps in preparing a statement of
Changes in Owner’s Equity by using the unadjusted trial
balance:

STEP 1: Gather the needed information.

The statement of Changes in Owner’s Equity is
prepared second to the Income Statement. Take note,
that the most appropriate source of nformation in
preparing financial statements would be the adjusted
trial balance; however, any report with a complete list of
updated accounts may be used.
Mabait Repair Services
Adjusted Trial Balance
December 31, 2018
STEP 2: Prepare the heading.

Like any financial statement, the heading is made up of three

lines. The first line isthe name of the company. The second
line shows the title of the report. In this case, the title is
Statement of Changes in Owner’s Equity, Statement of
Owner’s Equity, or simply Statement of Changes in Equity.
Any of the three titles would be all right. The third line shows
the period covered. The report covers a span of time; hence we
use “For the Year Ended” For the Quarter Ended, For the
Month Ended, etc. Some annual financial statements omit the
“For the Year Ended” phrase.
Example:
Mabait Repair Services
Statement of Changes in Equity
For the Year Ended, December 31, 2019
STEP 3. Report Capital at the beginning
of the period.
Report the capital balance at the beginning of the period
reported – or the amount at the end of the previous
period.
Example:
Mabait Repair Services
Statement of Changes in Equity
For the Year Ended, December 31, 2019
Mr. Mabait Capital, January 1, 2019 P 135,000
STEP 4. Add additional contributions.
Contributions from the owner increases capital,
therefore, it must be added to the capital balance.

Example:
Mabait Repair Services
Statement of Changes in Equity
For the Year Ended, December 31, 2019
Mr. Mabait Capital, January 1, 2019 P 135,000
Add: Additional Investment P30,000
STEP 5. Add net income.
Net Income increases capital, therefore it is added to the
beginning capital balance. Net income is equal to
all revenues minus all expenses.
Example:
Mabait Repair Services
Statement of Changes in Equity
For the Year Ended, December 31, 2019
Mr. Mabait Capital, January 1, 2019 P 135,000
Add: Additional Investment P30,000
Net Income 19,390 49,390
Total
STEP 6. Deduct owner’s withdrawals.
Withdrawal made by the owner is recorded separately
from contributions. It can easily found in the adjusted
trial balance as “Owner, Drawings”, “Owner
withdrawals”, or any other appropriate account.
Withdrawals decreases capital, therefore it must be
deducted to the capital balance.
Example:
Mabait Repair Services
Statement of Changes in Equity
For the Year Ended, December 31, 2019
Mr. Mabait Capital, January 1, 2019 P 135,000
Add: Additional Investment P30,000
Net Income 19,390 49,390
Total
P184,390
Less: Withdrawal P 5,000
STEP 7. Compute for the ending capital
balance.
Compute for the balance of the capital account at the
Example:
end of the period and draw the lines.
Mabait Repair Services
Statement of Changes in Equity
For the Year Ended, December 31, 2019
Mr. Mabait Capital, January 1, 2019 P 135,000
Add: Additional Investment P30,000
Net Income 19,390 49,390
Total
P184,390
Less: Withdrawal P 5,000
Mr. Mabait Capital, December 31, 2019 P 179, 390
Elements of a
Statement of
Changes in
Initial Investment — refers to the very first
investment of the owner to the company.

Additional Investment — increases the

owner’s equity by adding investments by the owner
(Haddock, Price, & Farina, 2012).

Withdrawals — Decreases the owner’s equity by

withdrawing assets by the owner (Haddock, Price, &
Farina, 2012).
Distribution of Income — When a company is
organized as a corporation, owners (called shareholders)
does not decrease equity by way of withdrawal. Instead,
the corporation distributes the income to the
shareholders based on the shares that they have
(percentage of ownership of the company).
Distribution of Income — When a company is
organized as a corporation, owners (called shareholders)
does not decrease equity by way of withdrawal. Instead,
the corporation distributes the income to the
shareholders based on the shares that they have
(percentage of ownership of the company).
References
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