Statement of Change in Equity: Aiza C. Hampton Lpt. Mba

Statement of

Change in
Equity
AIZA C. HAMPTON LPT. MBA.
Objectives

At the end of this lesson, you should;

1. Review on the forms of business organizations
2. Know the accounts that comprise the owner's equity
section of the Financial position.
3. Prepare the statement of changes in owner's equity.
Forms of Business Organizations
SOLE PROPRIETORSHIP
PARTNERSHIP
CORPORATION
Statement of Changes in Equity (SCE)
Organizational Structure
Whereas the SCE format is based on the type of business, the
SCE format is based on the organizational structure of the
business. To review, the 3 organizational structures are:
SINGLE/SOLE PROPRIETORSHIP –An entity whose assets, liabilities,

income and expenses are centered or owned by only one
person.
PARTNERSHIP – An entity whose assets, liabilities, income and
expenses are centered or owned by two or more persons.
CORPORATION – An entity whose assets, liabilities, income and
expenses are centered or owned by itself being a legally
separate entity from its owners. Owners are called shareholders
or stockholders of the company.
Statement of Changes in Equity
For a sole proprietorship type of business, the Statement of

Changes in Equity includes the following items:
• Capital balance at the start of the accounting period.
• Any additional investments and contributions by the owner.
• Net income enjoyed or net loss suffered by the company.
• Any withdrawals by the owner.
• Capital balance at the end of the accounting period
(adjusted capital balance).
Begginning Capital
Additional investments
Net income Net Loss
Withdrawals
Ending Capital
Different parts of the Statement of
Changes in Equity
1. Heading
i. Name of the Company
ii. Name of the Statement
iii. Date of preparation (emphasis on the wording – “for the”)
2. Increases to Equity
i. Net income for the year
ii. Additional investment
3. Decreases to Equity
i. Net loss for the year
ii. Withdrawals by the owner
Statement of Changes in Owner’s Equity for a Single/Sole
Proprietorships
The “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 information in preparing
financial statements would be the adjusted trial balance;
however, any report with a complete list of updated
accounts may be used.
STEP 2: Prepare the heading.

Mabait Repair Services
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.
Mr. Mabait Capital, January 1, 2019 P135,000

STEP 4. Add additional contributions.
Contributions from the owner increases capital,
therefore, it must be added to the capital balance.
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
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.
Mr. Mabait Capital Beginning P135,000

Add: Additional Investment P30,000
Net Income 19,390 49,390
Total P184,390
Less: Withdrawal 5,000
STEP 7. Compute for the
ending capital balance.
Compute for the
balance of the capital
account at the end of the
period and draw the lines.
Take note, one horizontal
line means that a
mathematical operation
has been performed. Two
horizontal lines (double-
rule) are drawn below the
final amount.
For you to understand more the Statement of Changes in
Equity, you must also know the difference of initial
investment and the additional investments and define
withdrawals.
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/Drawings –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).
Capital- is an account bearing the name of the owner
representing the original and additional investment of the owner
of the business increased by the amount of net income earned
during the year. It is decreased by the cash or other assets
withdrawn by the owner as well as the net loss incurred during
the year.
Income Summary- is a temporary account used at the end of
the accounting period to close income and expense accounts.
The balance of this account shows the net income or net loss for
the period before it is closed to the capital account.
Activity 1: Matching Type Directions: Match Column A
with Column B. Write your answer on your answer sheet.
Activity 2: Fill in the Blanks
A. The steps in preparing the Statement of Changes in Equity the
following:(1)______________________,(2),______________________________,(
3)_______________________________,(4)_______________________________, (5)
________________________________,(6) _____________________________, (7)
_____________________________________.
B. The (8) ___________________________ summarizes the changes, that occurred in
owner’s equity.
C. In the case of sole proprietorship, increases in owner’s equity arise from (9)
______________________________ and (10)________________ during the period.
D. The net amount computed after deducting all your liabilities from your assets
are designated as your (11) ____________________.
E. The very first investment of the owner to the company is called
(12)_________________________.
F. Increases in owner’s equity without additional investment
(13)_______________________.
G. Decreases to owner’s equity apart from net effect of revenues and
expenses.(14) ____________________ or (15)___________________________.
Activity 3: COMPUTE and PREPARE
Directions: For 3-point each, compute the following problems. Write your answer
and solution on the answer sheet.
1. Beginning Owner’s equity amounted to Php500,000. Net loss
for the year totaled Php50,000. No additional investments and
withdrawals for the period. Compute for total increase in equity
for the year.
Ans. _______________________________
2. Ending owner’s equity amounted to Php80,000. Additional
investments during the year amounted to Php50,000.
Withdrawals totaled P60,000. Compute for the company’s
income for the year assuming beginning equity is Php20,000.
Answer: ____________________________
3. Beginning Owner’s equity amounted to P200,000. Net Income
for the year totaled P55,000. Additional Investment during the
year amounted to 30,000. No withdrawals for the period.
Compute for total increase in equity for the year.
Ans. _______________________________
4. Owner, Pedro invested an initial capital amounting P50,000 in order to put
up his car wash business. During the first year of operations (2018), the
business had a loss of Php25,000. Because of this, Pedro invested additional
capital amounting to Php50,000 in 2019. In the second year (2019), the
company had a net income of Php100,000 and Pedro withdrew Php10,000
for personal use. Compute for the ending capital balance of Pedro for the
year 2019.
Ans. _________________________________________
5. The following balances were taken from the records of Jose Malabag’s
Laundry Services for the year ended December 31, 2019. Prepare the
statement of Changes in Equity of Jose Malabag’s Laundry Services.
Capital, January 1, 2018 Php300,000
Withdrawals 50,000
Additional Investment 50,000
Net Loss 35,000
The SCE is the connecting link between
the income statement and balance sheet.
It is especially important to investors

and owners to see how much their
ownership of the company has increased
or decreased, and the reasons why.

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Statement of

At the end of this lesson, you should;

SINGLE/SOLE PROPRIETORSHIP –An entity whose assets, liabilities,

For a sole proprietorship type of business, the Statement of

STEP 2: Prepare the heading.

Mr. Mabait Capital, January 1, 2019 P135,000

STEP 5. Add net income.

Mr. Mabait Capital Beginning P135,000

It is especially important to investors

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