SAINT ANTHONY ACADEMY OF GONZAGA SY 2021-2022

SUBJECT: FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 2

LESSONS: STATEMENT OF CHANGES IN EQUITY
PREPARD BY: KELVIN JAY S. SAPLA Email: [email protected]

PART I. INTRODUCTION
This lesson discusses the three forms of business organization: single proprietorship, partnership, and
corporation. This lesson also aims to talk about the unique features as well as the advantages and disadvantages of the
aforementioned business organizations.
At the end of this lesson, you are expected to discuss the different forms of business organization and prepare
a statement of changes in equity of a single/sole proprietorship.
PART II. STANDARDS
CONTENT: the forms of business organization, namely, single proprietorship, partnership, and corporation, and the
structure of a SCE of a single proprietorship that will equip him / her in the preparation of the said financial report
PERFORMANCE: solve exercises and problems that require preparation of an SCE for a single proprietorship
LEARNING COMPETENCIES:
1. solve exercises and problems that require preparation of an SCE for a single proprietorship
2. prepare an SCE for a single proprietorship
PART III. TRANSFER
Transfer Goal: The end product or output of accounting (financial accounting, to be specific) is useful
financial information. This useful financial information is the “story” that accounting tells to the interested
users. Useful financial information helps the owner to answer the question, “Should I invest more cash in the
business?
Creditors are also guided by this information in answering the question, “Should we lend more money
to the business?”
Financial information is contained and communicated through the financial statements. Financial statements
are like chapters of a novel, telling different storiesof an interrelated subject. Especially, financial statements
are organized depictions of the events that happened in a business. A complete set of financial statements are
composed of the following (IASB 2011):
1. Statement of Financial Position or Balance Sheet
2. Statement of Comprehensive Income or Income Statement
3. Statement of Changes in Equity
Statement of Cash Flow

PART VI. DISCUSSION/ SUMMARY

TERM DEFINITION

Statement of Changes in Equity All changes, whether increases or

decreases to the owner's interest in the company during the period are
reported here. This statement is prepared before the preparation of the
Statement of Financial Position to be able to obtain the ending
balance of the equity to be used in the SFP. (Haddock, Price, &
Farina, 2012).

Single/Sole Proprietorship All changes, whether increases or

decreases to the owner's interest in the company during the period are
reported here. This statement is prepared before the preparation of the
Statement of Financial Position to be able to obtain the ending
balance of the equity to be used in the SFP. (Haddock, Price, &
Farina, 2012).
Partnership an entity whose assets, liabilities, income, and expenses are centered
or owned by two or more persons (Haddock, Price, & Farina, 2012).
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 (Haddock, Price, & Farina, 2012).
Initial Investment The very first investment of the owner to the company.
Additional Investment Increases to owner’s equity by adding investments by the owner
(Haddock, Price, & Farina, 2012).

Withdrawal Decreases to owner’s equity by withdrawing assets by the owner

(Haddock, Price, & Farina, 2012).
ACTIVITY 1
Presented below are the possible advantages and disadvantages of a sole proprietorship, partnership, and corporation.
Determine on the column the item pertains to an advantage or disadvantage. In the second column, determine the
related business organization. Item 1 is an example. Write your answer on a sheet of paper.

Information Advantage or Business

Disadvantage Organization
In the event of bankruptcy, business creditors can run Disadvantage Sole Proprietorship
after the personal assets of the owner(s) Partnership

Involvement of more persons in the business; hence

more sources of expertise as
compared to the most simple business
organization
Transferability of ownership
Unlimited life
Business organization as a juridical or
separate person
The corporate existence of 50 years, renewable
The most limited source of fund
Most regulated business organization
Double taxation
Limited liability
Unlimited liability

REFLECTION: _____________________________________________________________________________
Lesson 3.1 Types of Business Organizations
The business entity concept is a prevailing assumption in accounting. It states that the transactions of the
owners (as a separate entity) must be distinguished and differentiated from the transactions of the owners. Business
transactions must be captured in the financial statements of the reporting entity. Personal transactions, on the other
hand, must be kept in the records of the owners.
There are three major types of business organizations in the Philippines, based on the classification of
ownership. These business organizations are sole or single proprietorship, partnership, and corporation.
1. Sole/Single Proprietorship
This is a business organization owned by one person. The owner of the sole proprietorship is the proprietor. In
most cases, the proprietor is also the general manager of a sole proprietorship. As a general manager, he oversees the
day-to-day operations of the sole proprietorship. A sole proprietor is more involved than other business owners. Sole
proprietorships are relatively easy to organize.
Major disadvantages of a sole proprietorship include the limited source of capital, proprietor's unlimited
liability, and the business entity's limited existence. The sole proprietor is the major source of financing available for
business. Another major disadvantage of a sole proprietorship is the unlimited liability of the sole proprietor.
Bankruptcy occurs when the sole proprietorship is unable to pay debts. In the Philippines, in case that the assets of a
sole proprietorship are not enough to cover its existing liabilities, creditors can run after the personal assets of the
owner. Lastly, sole proprietorships have limited life. A sole proprietorship generally co-exists with the sole proprietor.
Common examples of sole proprietors are stores and individuals rendering professional services like lawyers,
physicians, dentists, and accountants.
Partnership
Title lX, Chapter 1 of the Philippine Civil Code defines partnership as a contract where two or more persons
bind themselves to contribute money, property, or industry to a common fund, to divide the profits among themselves.
These persons are called partners. Their agreement is contained in a document called articles of partnership. The
ultimate goal of the partner is to divide the profits among themselves.
A key advantage of a partnership is the ease of organization, as compared to a corporation. The contract of the
partnership may be oral or in writing, as a general rule. Another advantage of a partnership is the entity's larger source
of capital and expertise, as compared to a sole proprietorship.
Major disadvantages of the partnership include unlimited liability, limited existence, and mutual agency of the
partners. Generally, a partner’s liability in the
the partnership can extend to his or her personal properties, similar to a sole proprietorship. However, the unlimited
liability of a partner is subject to exceptions (i.e., the concept of a limited partner). Partnerships also have a limited
existence. Generally, any change in the partnership may dissolve the entity. The most common reason for a
partnership's dissolution is the death of one partner. Finally, a mutual agency may also be a disadvantage to a
partnership. Mutual agency means that each partner may bind the partnership and the other partner in business-related
matters. For example, if one partner obtains a business loan on behalf of the partnership, the partnership and the other
partner are bound by the said loan.
Common examples of partnerships are legal (law) firms and accounting firms.
2. Corporation
The Corporation Code of the Philippines (1980) defines the word corporation as an "artificial being created by
operation of law, having the right word of succession and the powers, attributes, and properties expressly authorized by law or
incident to its existence.”
 Corporation as Artificial Being

In the eyes of the law, a corporation is an artificial being independent of its owners. A corporation has a name
and birthdate (incorporation date) just like a normal person. As an artificial being, a corporation has rights, powers,
and attributes. Here is an example of a right of a corporation: It can acquire its property. The names, powers, objectives,
and registered address of a corporation are included in a document called the articles of incorporation.
Owners of a corporation are called stockholders (also called shareholders). Generally, stockholders have the
right to vote, dividends, and new stock issues. The right to vote pertains to the stockholders' ability to participate in the
significant decision making agenda of the corporation through voting. Voting in a corporation is generally proportional
to the number of shares held by the stockholder.
The major advantage of a corporation is the centralization of management through the board of directors. The
board of directors exercises functions over the corporation. They protect the interest of the stockholders. Another
advantage of corporate organizations is its long existence. Generally, corporations in the Philippines are given a life of
50 years, subject to renewal. Ownership of a corporation may be inherited by the respective heirs of the original owners.
The liabilities of a corporation may not extend to the stockholders, unlike in sole proprietorship and partnership.
Stockholders are only liable to the extent of their original investment in the corporation.
The major disadvantage of a corporation is its stringent requirements for registration. Registering a corporate
entity in the Philippines will take a significantly longer period than organizing a sole proprietorship or partnership.
Also, corporations are subjected to heavy government regulation through the Securities and Exchange Commission
(SEC). Corporations are also subjected to double taxation. The income of the corporation in itself will be subjected
to a corporate income tax of 30%. If the corporation decides to declare dividends to its stockholders, the dividends are
again subjected to a withholding tax.

Lesson 3.2. Preparation of Statement of Changes in Equity for Sole Proprietorship

Preparing a statement of changes in equity (SCE) for a sole proprietor is quite straightforward. The elements
of an SCE for a sole proprietorship include the beginning capital, additional income, net income, and withdrawals.

Sample Statement of Changes in Equity

Bimby Food Cart Statement

of Changes in Equity
For the year ended December 31, 2019
Mr. Bimby Equity, Beginning 100,000.00
Add:
Additional Investment 10,000.00
Net Income 25,000.00 35,000.00
Total Equity 135,000.00
Less: Owner’s, Withdrawal (20,000.00)
Mr. Bimby Equity, Ending 115,000.00
========
Figure 1. Sample Statement of Changes in Equity for Sole Proprietorship
Lesson 3.3 Steps in Preparation of Statement of Changes in Equity
1. Draft the heading.
The heading of SCE resembles that of a comprehensive income. This is because the SCE shows the movement in the
capital account of the owner.
2. Determine the beginning balance of capital (equity)
The equity beginning is the operating balance of the owner's equity account. This is the ending balance of the equity
account of the previous year. In the case above, this also pertains to the balance as of January 1, 2020, or December 31,
2019.
3. Determine the amount of investment (initial or additional)
Additional investment pertains to any capital infusion made by the owner for the year. For the first year of operation, the
SCE should bear the line item “initial investment”, instead of “additional investment”, which would be used for the
succeeding year of operations. The amount of initial investment can be traced to the general ledger account or T-account.
4 Determine the amount of the net income
Net income, on the other hand, pertains to the amount earned by the sole proprietorship for the year. This amount is taken
from the statement of comprehensive income. This is the reason why the statement of comprehensive income is first
constructed before the SCE.
5Determine the balance of the drawing (withdrawal) account
After net income, drawing is deducted from the balance. This can be done by referring to the ledger balance or T-account
of the withdrawal account. The drawing represents the owner's return on investment.
6. Determine the ending balance of the capital or owner’s equity account. After determining the beginning
balance, investment, net income (or net loss), and withdrawal, the accountant will determine the ending balance of the
equity account.
Finally, the equity ending represents the equity balance of Mr. Snackstore as of December 31, 2019.

Congratulations! You have just finished Lesson 3 of this module.

EVALUATION
. Solving the Problem Case #1. Paa Law Firm
PaaLaw Firm is owned by Atty. Jella Paa. The balance of his capital as of January 1, 2019, is P 1,800,000.00. During
the year, he invested additional cash of P 450,000.00 in the business. Also, Paa Law Firm earned P 168,750.00 of net
income. Finally, he withdraws P 112,500.00.
1. How much is the balance of Atty Paa's capital as of December 31, 2019?
2. Prepare a Statement of Changes in Owner’s Equity for Paa Law Firm.
Solving the Problem Case #2. Serrano Medical Clinic
Serrano Medical Clinic is owned by Dr. Andy Serrano. The balance of Dr. Serrano’s capital is P 400,000.00 as of
January 1, 2019. During the year, she invested an additional P 100,000.00 in the business. Also, Serrano Medical Clinic
earned P 37,500.00 of net income. Finally, she withdraws P 25,000.00 for personal use.
1. How much is the balance of Dr. Serrano’s capital balance as of December 31, 2019?
2. Prepare a Statement of Changes in Owner’s Equity for Serrano Medical Clinic.
MULTIPLE CHOICE
Now, that you are finished accomplishing the module, let us check what you have learned. Answer
the questions given below by encircling the letter of the correct answer.

1. Which of the following pertains to a business entity concept?

A. Transactions of a business (as a separate entity) must be distinguished with transactions of the
owners.
B. Transactions of the business (as a separate entity) must be merged with the transactions of
the owners.
C. Revenues are recorded when it is earned.
D. Revenues are recorded when the corresponding cash has been received.
2. Which of the following is a major type of business organization??
A. Sole Proprietorship
B. Partnership
C. Corporations
D. All of the above
3. How many are considered owner(s) of a sole proprietorship?
A. One
B. More than one
C. Two but not more than five
D. Five and above
4. How many is/are considered owner(s) in a partnership?
A. One
B. More than one
C. Two but not more than five
D. Five and above
5. How are owners of a sole proprietorship called?
A. Sole proprietors
B. Partners
C. Shareholders/Stockholders
D. None of the above

References
Arganda, A. M. (2016). Fundamentals of Accounting Bookkeeping 1. Anvil Publishing, Inc.
Josefina L. Beticon, J. C. (2017). Fundamentals of Accountancy, Business and Management 2 - Teacher's Manual. Vibal Group. Inc.
Reyes, V. D. (2017). Fundamentals of Accountancy, Business and Management 2. GIC Enterprises & Co., Inc.
Salazar, D. R. (2017). Fundamentals of Accountancy, Business and Management 2. Rex Bookstore.
Additional References:
Teacher’s Guide in Fundamentals of Accountancy, Business and Management 2
https://edge.pse.com.ph/openDiscViewer.do?edge_no=5b3feb584ad68ec41db82e377ee70f3