The Statement of

Changes in
Owner’s Equity
Accountancy, Business and Management 2
The Statement of Changes in
Equity

• The Statement of Changes in Equity is one of

four general purpose financial statements and
is the second financial statement prepared in
the accounting cycle. This statement displays
how equity changes from the beginning of an
accounting period to the end.
The Statement of Changes in
Equity

• The financial statements form a set of

interrelated reports. The Statement of
Financial Position (SFP) was discussed in
Chapter 1. In chapter 2, we studied the
Statement of Comprehensive Income (SCI).
The third part of the set, which we will
discuss in this chapter, is the Statement of
Changes in Equity (SCE).
The Statement of Changes in
Equity

• Recall that the SFP is a report on the

company’s assets, liabilities, and equity. The
equity component of the SFP shows the claim
of the owners on the company’s assets. This
is the reason why equity account are of
particular interest to the readers of the
financial statements. The SCE is prepared to
meet the requirements of the readers to
understand the transactions that caused the
movements in equity account.
The Statement of Changes in
Equity

• The SCE is a statement dated “for the year

ended”. The report shows a reconciliation of
the beginning and ending balances of the
equity account. It summarizes the equity
transactions with the owners of the business
that occurred during the year.
The Statement of Changes in
Equity
 Forms of Business
Organization

• The business organization determines the

presentation of the SoCE and equity portion of
the SFP. In this light, we begin our study with a
review of the forms of business organizations.
• There are three basic forms of business
organization, namely: (1) sole proprietorship,
(2) partnership, and (3) corporation. They
differ in terms of number of owners, legal
personality of the business, and ease of
transferability of ownership.
 Forms of Business
Organization

• Sole Proprietorship is the simplest form of a

business organization. Only one individual
owns the business. There is only one owner
referred to as sole proprietor. Oftentimes,
the owner is also the manager.
 Forms of Business
Organization
• Partnership is an association of two or more
persons to carry on as co-owners of a business
for profit. They are called partners. They pool
their resources together such as money property
and industry, to operate a business and divide
the profit among themselves. Partners re
generally involved in the management of the
business. The agreement of the partners is
stated in the contract of partnership specifically,
the partner’s profit and loss sharing
arrangements.
 Forms of Business
Organization
• Corporation is the most complex form of
business organization. It is a separate body
consisting of at least five individuals and treated
by law as a unit. It is an artificial being created
by law, having the right of succession and the
powers, attributes and properties expressly
authorized by law or incident to its existence. A
corporations is owned by many owners called
stockholders or shareholders.
Preparation of Statement of
Changes in Equity

The Statement of Changes in Equity contains:

A. The Heading
1. Name of the Business John Lee Trading
2. Title of the Report Statement of Changes in Equity
3. Date of the Report For the period ended December 31, 2019
4.Currency (in Philippine Peso)
B. Investments
C. Drawings (Withdrawal from investment)
D. Net Income/Loss for the period
 Forms of Business
Organization
• The form of business organization determines
the equity accounts reported on the financial
statement. As we have reviewed above, the
form of business organization differ in terms of
number of owners and the transferability of
ownership. These inherent characteristics of
business organizations led to the difference in
the presentation of equity.
SCE for Sole Proprietorship

• The SFP and SCE present one capital account

because there is only one owner. The owner’s
capital account follows this naming convention:
(Owner’s name), Capital. If the same of the sole
proprietor is John Lee, then the name of the
account is John Lee, Capital. The owner’s Capital
account tracks the following transactions of the
owner: (1) capital contributions; (2) withdrawals
and (3) net income or net loss generated by the
business. The SCE of a Sole Proprietorship is
basically a summary of the owner’s capital account.
 How to prepare SCE for a
Sole Proprietorship
• Mina Dy is the owner of the MD Convenience
Store. The store was established on January 1,
2020. Mina deposited P 10,000 to a bank
account in the name of MD Convenience Store.
She made three more deposits of P 2,500 each
during the year from her personal account. The
store generated net income of P 35,670 in 2020.
Mina regularly withdraws P 1,000 per month
from the store’s bank account for her personal
expenses.
 How to prepare SCE for a
Sole Proprietorship
Answer:
 SCE for Partnership

• A partnership is owned by two or more partners. Our

objective is to account for the equity of each partner.
Therefore, we need more than one capital account.
As a matter of fact, the number of capital accounts
that will be reported on the SCE and the SFP is equal
to the number of partners. Similar to the capital
account used in sole proprietorships, each partner’s
capital account will track his contributions to the
business, his share in the net income and his drawings.
A Drawings account is also maintained for each
partner. The naming convention for both the capital
and drawings accounts is the same as in sole
 SCE for Partnership

• How do we determine that amount of net

income that will be closed to each partner’s
capital account? Accountants call this process
“allocation of net income”. Net income is
allocated based on the profit and loss sharing
agreement stipulated in the partnership
contract. Allocation of net income is unique
only to partnership.
How to prepare SCE for Partnership

• The 3J Partnership was established in 20x0.

The partners, Jordan, Justin and Jane have
January 1, 20x1 outstanding capital balances
of P 25,600, P 43,800 and P37,655,
respectively. Jordan contributed P 15,000
during 20x1. Justin and Jane also contributed
P 10,000 each in 20x1. The 20x1 year end
balances of each partner’s Drawings account
are as follows: Jordan P 12,000, Justin P
15,000 and Jane P 14,000.
How to prepare SCE for Partnership

• The partnership reported 20x1 net income of

P 75,650. According to the partnership
agreement, the partner’s profit sharing ration
is 30%, 40% and 30% for Jordan, Justin and
Jane.
• Prepare the 20x1 SCE of 3J Partnership.
How to prepare SCE for Partnership

Answer:
 SCE for Corporation

• In a corporation, there are many owners and

stockholders. The equity is not shown per
individual stockholders, instead, the owners’
equity is shown as a group of stockholders.
SCE for Corporation