Statement of

Changes in
Equity
 Learning Objectives
1.Discuss the forms of business organizations and unique
equity accounts used by each of these organizations.
2.To differentiate the forms of business organization and
identify the advantages and disadvantages of each.
3.Identify the parts of the Statement of Changes in Equity.
4.Construct a Statement of Changes in Equity for a Sole
Proprietorship.
Capital or Owner's Equity

Capital is also known as Owner's equity.

It represent the right of the owner over the
resources of the firm.
It is also called net assets or residual assets.
From the account equation, we can derive
owner's equity.
Formula:

Owner's Equity = Assets - Liabilities

Example:
If a real estate project is valued at $500,000 and the loan
amount due is $400,000, the amount of owner's equity, in this
case, is $100,000.
 Forms of
Business
Organizations
and the
Equity Accounts
 Sole Proprietorship
This is a type of business in which is owned by only one
person. Usually a sole proprietor is alwo the manager or
boss of his own business.

Example: local restaurants and shops, home-based business

Advanatges: Disadvantages:

the proprietor alone enjoys the profits all the responsibility for making day-
gained by the business to-day business decisions is yours

lesser tax to pay limited ability to rise funds

it’s easy to change your legal structure you have unlimited liability for debts
later if circumstances change you can as there’s no legal distinction between
easily wind up your business private and business assets
 Partnership
By the contract of partnership, two or more people join
together to contribute money, property or industry for
purposes of dividing the profits or loss among themselves.

Example: law firms, physician groups, accounting groups

Advantages: Disadvantage:

more capital is available for the the liability of the partners for the
business debts of the business is unlimited

exempted from paying corporate

difficulty in decision making
income taxes

formation is easier than that of the

corporation because of the minimal higher tax rate
regulatory requirements
 Corporation
It is composed of five to fifteen people. It is organized by
operation of the law and considered the most complex form
of a business organization.

Example: San Miguel Corporation, ABS-CBN Corporation,

Shell Philippines
Advantages: Disadvantages:

it has the capacity to raise more it is costly to form and mange a

capital corporation

it has limited liability higher income tax

it can exist for a period not more

start-up costs are higher
than 50 years, subject to renewal
Form of Business Account Titles

Sole Proprietorship Name of owner, capital

Partnership Name of owner, capital (create as many capital

account as there are owners

Corporation Stockholder's equity

Parts of the Statement of Changes in Equity

Beginning capital represent the total capital at the start of the

business. If the firm has been operating in the past year, the
beginning capital of the current year is the same the ending
capital of the previous year.
Investments made by the owner may present the original
investment made at the start of the business, and any additional
investments there after. Investment are added to the capital
beginning to arrive at the total investments used during the year.

Net profit is also derived from the income statement and is also
added to the beginning capital and additional investments done
during the year. If the business is incurred a net loss, the same is
deducted.
Withdrawals or drawings or the resources of the firm which
were taken by the owner or personal use.

Ending capital is the difference arrived at the after deducting

withdrawals from the sum of the beginning capital, additional
investments, and profit. Ending capital is also represents the
residual claim of the owner on the total resources or assets of the
firm after deducting the claims of creditors.
Example of a Statement of Changes in Equity
for a Sole Proprietorship
Happy Hearts Co.
Statement of Changes in Equity
Year ended 31 December 2016
Begining capital ? 350,000
Add: Investment made during the year 280,000
Net Profit 148,500
Total 778,500
Less: Withdrawals 222,000
Ending Capital 556,500
 Steps in Preparing the Statement of Owner's
Equity

Step 1. Gather the needed information

The Statement of Changes in Owner's Equity is prepared second to the Income
Statement. We will still be using the same source of information. Again the
most appropriate Source of the information in preparing financial statements
would be the adjusted trial balance.
Step 1. Gather the needed information
 Step 2. Prepare the Heading
The heading is made up of three lines. The first bline contains the
name of the company. The second line shows the title of the report:
it would be the Statement of Changes in Owner's Equity, Statement
of Owner's Equity, or simply Statement of Changes in Equity. The
third line shows the perriod covered. The report covers a span of
time; hence we use For the Year Ended, For the Quarter Ended,
For the Month Ended, etc.
Step 2. Prepare the Heading
 Step 3. 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. Remember
that the ending balance of the last period is the beginning
balance of the current period.
 Step 4. Add Additional Contribution
Contributions from the owner increases capital, hence added to the
capital balance.
 Step 5. Add Additonal Contribution
Net income increases capital hence it is added to the beginning
capital balance. Net income is equal to all revenues minus all
expenses.
 Step 6. Deduct Owner's withdrawals
Withdrawals made by the owner is recorded separately from
contributions. You can easily find it in the adjusted trial balance as
"Owner, Drawings", "Owner, Withdrawals", or any other appropriate
account. Withdrawals decrease capital, hence are deducted.
 Step 7. Compute for the ending balance
Compute for the balance of the capital account at the end of the
period and draw the lines. One horizontal line means that a
mathematical operation has been performed. Two horizontal lines
(double-rule) are drawn below the final amount.
Presented by 11 ABM

Althea L. Pesebre
Heizel Laurio
Princess Colyn Mallari
Thank you for
Listening!!!