Lesson 3.

Introduction to Statement
of Changes in Owner’s
Equity

Fundamentals of Accountancy, Business,

and Management 2
Accountancy, Business, and Management

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Have you ever wondered how
business owners keep track of their
holdings and ownership in a
business? Owners are particularly
interested in several questions.

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How much did my investment
grow in the last accounting
period? What factors affected the
increase or decrease in my
investments' value?

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These concerns can be
informed by one of the
financial statements used in
accounting: the Statement of
Changes in Equity.

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The Importance of Statement of Changes in
Equity
Assume that you recently started an online selling business of windbreakers. You
initially invested ₱10,000.00 to purchase the items you will sell. The cost of the
merchandise is ₱1,400.00. Your friends are highly supportive of your business and
bought merchandise items worth ₱3,000.00. Your profit is ₱1,600.00 (₱3,000.00 sales –
₱1,400.00 cost of sales).

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The Importance of Statement of Changes in
Equity
The question now is, how did your initial investment of ₱10,000.00 change with regard
to the transactions that occurred?
You may present the changes in this format:
Beginning Owner’s Equity ₱10,000.00
Profit ₱ 1,600.00
Ending Owner’s Equity ₱11,600.00

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The Importance of Statement of Changes in
Equity
Now, look at that! Your equity changed from ₱10,000.00 to ₱11,600.00. What can you
do with this information? To what degree does it benefit your business? These questions
will be answered in this lesson. But first, you will start by learning the basic concepts.

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Questions to Ponder

1. What transactions are involved in the first month of your online selling venture?
2. How do these transactions affect the business?
3. What is the importance of the Statement of Changes in Equity to business?

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Discuss the different forms of business organization
(ABM_FABM12-Ie-8).

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Are there advantages and
disadvantages to the various forms
of business organizations?

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Introduction to Statement of Changes in Owner’s Equity

All business organizations utilize the Statement of Changes in Equity

(SCE). It shows that the SCE is a universal tool used by businesses
regardless of their ownership structure and business activity.

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Introduction to Statement of Changes in Owner’s
Equity
Partnership
based on mutual trust and uses a
partner's expertise to achieve a

Sole Proprietorship 2 common goal

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suitable if an owner wants total
control over the business.

Corporation
3
the business's liabilities do not
extend to the personal assets of
owners

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 The Statement of Changes in Equity

a financial statement showing the

changes that occurred to the equity Statement of Changes in
portion of the balance sheet Equity

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 The Statement of Changes in Equity

provides a detailed view of what

transactions or events caused the Statement of Changes in
equity balance to change within a Equity
particular accounting period

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 The Statement of Changes in Equity

Uses:
● provides them with information regarding their investments
● use it to examine the detailed description of the equity balance
reported on the balance sheet

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 The Statement of Changes in Equity

Uses:
● used to understand the events that occurred, affecting the equity of the
business owners
● helps decide future investment strategies that the business will apply

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 The Statement of Changes in Equity and Decision Making

There are different ways in which the SCE can be useful in

decision-making. Assume that your windbreaker store wants to examine the
growth of your investment in relation to the profit of the business. You want
to know how you can improve your operations in the future.

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 The Statement of Changes in Equity and Decision Making

The results of your current operations is as follows:

Beginning Owner’s Equity ₱10,000.00
Profit ₱ 1,600.00
Ending Owner’s Equity ₱11,600.00

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 The Statement of Changes in Equity and Decision Making

Gaining profit increased the value of the initial owner’s equity. You can
evaluate the various strategies you can use to increase your revenue and
forecast its effect on the owner’s equity.

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 Business Organizations Utilizing the SCE

Aspect Sole Proprietorship Partnership Corporation

Ownership Single owner Two or more partners Owned by many

individuals called
stockholders or
shareholders

Profit or Loss Directly goes to the Shared depending on Dividends are declared
Sharing single owner predetermined terms and given on a per
agreed among the share or ownership
partners basis

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 Business Organizations Utilizing the SCE

Aspect Sole Proprietorship Partnership Corporation

Liability Unlimited liability Divided between the Limited liability

partners, depending on
the agreed terms of the
partners

Decision Making Decisions are made Each partner is Board of directors and
solely by the single responsible for the officers
owner decisions

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 Business Organizations Utilizing the SCE

Aspect Sole Proprietorship Partnership Corporation

Lifespan Depending on the Dissolved through Unlimited life

desire to continue and admission, withdrawal
the physical life of the and death of a partner
owner

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 Business Organizations Utilizing the SCE

Statement of Changes in Statement of Changes in

Equity Owner’s Equity

a general financial statement for a sole proprietorship business

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 Business Organizations Utilizing the SCE

Statement of Changes in Statement of Changes in

Partner’s Equity Shareholders’ Equity

for a partnership business for a corporation

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 How can the Statement of Changes in Equity be used by the different
1 forms of business organizations?

Answer area

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 Elements of the Statement of Owner’s Equity

The Statement of Changes in Owner’s Equity is affected by various

elements

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 Elements of the Statement of Owner’s Equity

the value of the owner’s equity

Beginning Balance from the previous accounting
period

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 Elements of the Statement of Owner’s Equity

shows the performance of the

Profit or Loss business in a given accounting
period

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 Elements of the Statement of Owner’s Equity

● can be in the form of cash,

equipment, and other assets
Additional Investment ● came directly from the owner
and not a result of the
operations of the business.

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Elements of the Statement of Owner’s Equity

● withdrawals made by the

owner from the business
Drawings ● serves as a contra-account
charged to the equity portion
of the business

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 Elements of the Statement of Owner’s Equity

the residual value after deducting

the total liabilities from the total
Owner’s Equity
assets of the business

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 Elements of the Statement of Owner’s Equity

Computed by :
● adding the profit and
additional investments to the
Ending Equity beginning balance
● deducting any withdrawals
made by the owner

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 Elements of the Statement of Owner’s Equity

If the business incurred a loss

instead of generating a profit, the
loss is to be deducted from the
Ending Equity
beginning balance of the owner’s
equity.

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Elements of the Statement of Owner’s Equity

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 Are there any merits in establishing a specific form of business
2 organization as compared to another form?

Answer area

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 Illustration: Changes in Equity in a Sole Proprietorship

Now that you have an idea of the various forms of business organizations
and have knowledge regarding the Statement of Changes in Equity, it is
time to put what you have learned into practice.

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 Illustration: Changes in Equity in a Sole Proprietorship

Assume that Juan dela Cruz started his own business selling pre-loved
clothes. February 28, 2022 shows a balance of ₱3,000.00 in owner’s equity.
On March 15, he made an additional ₱1,000.00 investment worth of
merchandise. By March 25, he withdrew ₱2,000.00 from the business for
his personal use. Total profit by the end of the month was ₱4,500.00.

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 Illustration: Changes in Equity in a Sole Proprietorship

The above accounting period will show the Statement of Changes in Equity
as shown below.

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 Effects of International Sanctions on Owner’s Equity

Profit and loss have a significant impact on the Owner’s Equity. Consider
this international situation and examine its drastic impact on the equity of
business owners.

Hardingham-Gill, Tamara. “How Sanctions on Russia Are Shaking up the Superyacht World.” CNN. Cable News Network, March 25,
2022. https://edition.cnn.com/travel/article/russian-sanctions-shaking-superyacht-industry/index.html. 39
 Effects of International Sanctions on Owner’s Equity

When Russia invaded Ukraine in 2022, states such as the United States, the
United Kingdom, and the European Union seized the most expensive yachts
owned by Russian businesses in ports and shipyards.
This economic sanction negatively hit the superyacht industry. Reports say
that the building of yachts was placed on hold due to the ban on Russian
exports.

Hardingham-Gill, Tamara, “How Sanctions on Russia Are Shaking up the Superyacht World,” CNN (Cable News Network, March 25,
2022), https://edition.cnn.com/travel/article/russian-sanctions-shaking-superyacht-industry/index.html, last accessed August 1, 40
2022.
 Effects of International Sanctions on Owner’s Equity

Buyers suddenly became hesitant to purchase, affecting the short-term

profit, to say the least. With this drop in profit, investors and business
owner’s in the superyacht industry faced decreases in equity holdings. Such
reduction in equity holding caused by the profit decline will affect future
industry investments.

Hardingham-Gill, Tamara, “How Sanctions on Russia Are Shaking up the Superyacht World,” CNN (Cable News Network, March 25,
2022), https://edition.cnn.com/travel/article/russian-sanctions-shaking-superyacht-industry/index.html, last accessed August 1, 41
2022.
● The Statement of Changes in Owner’s Equity (SCE) is a financial statement that
measures the changes that occurred in a business’s owner’s equity portion during a
specific accounting period.

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● All types of business organizations use the Statement of Changes in Owner’s
Equity. However, since business organizations differ in their ownership,
profit-sharing, and liability structures, their SCE’s also take different forms.

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● The elements of the Statement of Changes in Owner’s Equity for sole
proprietorships are as follows:
○ Beginning balance of owner’s equity
○ Profit or loss
○ Additional investments
○ Drawings
○ Ending balance of owner’s equity

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● The Statement of Changes in Equity can be used in analyzing the changes that
occurred in the owner’s equity to plan future investment strategies.

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True or False.

1. The Statement of Changes in Equity shows changes that occurred in

the equity portion of the balance sheet.

True False

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True or False.

2. The Statement of Changes in Equity is not a financial statement.

True False

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True or False.

3. The Statement of Changes in Equity is a detailed view of the equity

portion of the balance sheet.

True False

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True or False.
4. The Statement of Changes in Equity cannot be utilized in
understanding the events that occurred that affected the equity
portion of the balance sheet.

True False

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True or False.

5. Information in the Statement of Changes in Equity can be used in

decision making.

True False

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