Lesson 3.

Preparation of
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 experienced
budgeting your allowance for the
month?

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It seems impossible to keep track of
the specific items you spent the most
on, right? How convenient it would
be to see where your money went at
a glance.

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Businesses also need such tool. Due to
the numerous transactions that occur
every day, it is complicated to keep
track of the movements that affect its
equity.

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Thus, preparing the
Statement of Changes in
Equity is very important.

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How much did my allowance change?
The Statement of Changes in Equity (SCE) allows users to view the changes that
occurred in one’s equity in a given period. The user can look at the summary or the
specialized report, and no longer needs to manually and painstakingly dig out all the
information from the source documents.

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How much did my allowance change?
To illustrate the importance of SCE, consider the transactions involving your allowance.
Assume that:
● Your parents gave you ₱5,000.00-worth of allowance for the month.
● You bought a new desk worth ₱1,200.00.
● You also purchased a pair of noise-canceling headphones for ₱1,700.00.
● Your parents gave you another ₱1,000.00.

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How much did my allowance change?
You can summarize the items you bought, how much you spend, and how much you
still have using a format like the one below:

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Questions to Ponder
1. What transactions caused the allowance at the end of the month to increase and
decrease?
2. What would happen if these transactions did not occur for the month?
3. If you are a business owner, how will you utilize the Statement of Changes in
Equity?

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Prepare an SCE for a single proprietorship (ABM_FABM12-Ie-9).

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Why should businesses prepare a
Statement of Changes in Equity?

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 ● the financial interests of the
owners of the business
Equity ● the residual interest after
deducting all the business
liabilities from the total assets
thereof

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 ● reconciles the equity balance
Statement of Changes in ● shows the financial activities
influencing the equity account
Equity during a given accounting
period

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Transactions Affecting the Owner’s Equity of a Sole Proprietorship

Profits
Investments

Owner’s Equity

Drawings Losses

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 Transactions Affecting the Owner’s Equity

Profit Earned for a Given Period

● recognizing profit will increase the value of the owner’s equity
● is related and involved in the computation of the owner’s equity, a
balance sheet account

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 Transactions Affecting the Owner’s Equity

Additional Investments to the Business

● should come from the owner's pocket and not a result of the
business's operations
● can be:
○ initial investment made to start the business
○ additional investments made towards the business.

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 Transactions Affecting the Owner’s Equity

Withdrawals Made by the Owner

● are recorded in the drawings account of the business and charged
against the owner's equity
● key element: owner withdraws resources from the business for
personal use and not for the benefit of the business

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 Transactions Affecting the Owner’s Equity

Losses Incurred by the Business

● opposite of profit, decreases the owner’s equity once it is incurred
● total expenditure exceeds the total income earned by the business in a
given accounting period

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 Which transactions increase the owner’s equity? Which among them
1 contribute to the decrease in equity?

Answer area

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 Preparation of the Statement of Changes in Owner’s Equity

STEP 1: only the activities affecting the

Gather relevant equity portion of the business are
included
information

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 Preparation of the Statement of Changes in Owner’s Equity

follow a format which end-users

STEP 2: can quickly grasp without
Prepare the heading and investing too much time
the format interpreting each line item

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Preparation of the Statement of Changes in Owner’s Equity

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 Preparation of the Statement of Changes in Owner’s Equity

STEP 3: the beginning balance of equity for

Identify the beginning the current period is the ending
balance from the previous period
balance

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Steps in the Preparation of the Statement of Changes in Equity

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 Preparation of the Statement of Changes in Owner’s Equity

STEP 4:
● profits recognized for the
Identify additions period
involving equity for the ● additional investments
period

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 Preparation of the Statement of Changes in Owner’s Equity

STEP 5:
Identify deductions from ● withdrawals
● losses incurred
the equity balance for
the period

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 Preparation of the Statement of Changes in Owner’s Equity

● combine the period's total

additions and total
STEP 6:
deductions
Calculate the net ● if positive, there is a net
increase or decrease in increase
owner’s equity ● if negative, there is a net
decrease

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Preparation of the Statement of Changes in Owner’s Equity

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 Preparation of the Statement of Changes in Owner’s Equity

● carry out the operations

STEP 7:
○ additions will be added
Compute the ending ○ deductions will be
balance of owner’s deducted from the
equity beginning equity balance

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 Antonio’s Statement of Changes in Owner’s Equity

Step 1: Gather relevant information. Antonio Pantalan started his computer

repair shop on January 1, 2022. The following transactions pertain to
the operations for January 2022.

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 Antonio’s Statement of Changes in Owner’s Equity

2022
Jan 1 Antonio Pantalan invested ₱30,000.00 to start his computer repair business.
5 A customer brought in a laptop for repair and paid ₱1,000.00 in cash.
7 The business bought various supplies amounting to ₱2,000.00 and used it in business
operations for the month.
16 Antonio Pantalan invested non-cash items in the form of tools and equipment that cost
₱2,000.00.
25 Another customer went in for a repair of his laptop and paid ₱5,000.00.
28 Antonio Pantalan withdrew ₱8,000.00 from the business.

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 Antonio’s Statement of Changes in Owner’s Equity

Step 2: Prepare the heading and the format. Use the format in Figure 1 for
uniformity.

Step 3: Identify the beginning balance. Since the business has just started in
the current month, there is no beginning balance. Hence, the
beginning balance of the owner's equity is ₱0.00.

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 Antonio’s Statement of Changes in Owner’s Equity

Step 4: Identify additions involving equity for the period.

January 5, 2022 ₱1,000

January 25, 2022 ₱5,000 January 7, 2022 ₱2,000

Total Income ₱6,000 Total Expenses ₱2,000

Total income ₱6,000 Initial investment ₱30,000

Less: Total expenses ₱2,000 Additional ₱ 2,000

investment

Profit (loss) ₱ 4,000

Profit (loss) ₱4,000 Total additions ₱36,000

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 Antonio’s Statement of Changes in Owner’s Equity

Step 5: Identify deductions from the equity balance for the period. The
only deduction in the above example is the withdrawal made by
Antonio Pantalan, amounting to ₱8,000.00.

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 Antonio’s Statement of Changes in Owner’s Equity

Steps 6 and 7: Calculate the net increase/decrease and compute the ending
balance of the owner’s equity.

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Antonio’s Statement of Changes in Owner’s Equity

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● Single proprietorship businesses use the Statement of Changes in Owner’s Equity
to reflect the financial interests of the owner of the business.

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● The transactions that affect the owner’s equity of a sole proprietorship are
summarized in the following table.

Account Additions Deductions

Additional investments in Withdrawals made by the

the business owner
Owner’s Equity

Losses incurred by the

Profit earned for the period
business.

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The following are the steps in preparing the Statement of
Changes in Owner’s Equity.

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Identify what is being described.

1. This has the opposite effect of additional investments

Answer area

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Identify what is being described.

2. Withdrawals are recorded in this account

Answer area

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Identify what is being described.

3. Incurred when the business's total expenses are greater than total
income

Answer area

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Identify what is being described.

4. When a sole proprietorship recognizes this, it will be closed to the

owner or proprietor’s capital account and increase it

Answer area

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Identify what is being described.

5. A financial resource given by the owner to the business

Answer area

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