Statement of Changes

in Equity
 Learning Objectives
By the end of the chapter, the student should be able to:
1. Understand the purpose of the Statement of Changes in
Equity
2. Appreciate that the presentation of the Statement of Changes
in Equity is dependent on the form of business organization
3. Identify the elements of the Statement of Changes in Equity
4. Determine the nature of the different equity accounts used by
corporations
5. Prepare a Statement of Changes in Equity
 STATEMENT OF CHANGES IN EQUITY

- is prepared to meet the requirements of the readers to

understand the transactions that caused the movements in
equity accounts
 Is a statement dated “for the year ended.”
 Shows a reconciliation of the beginning and ending
balances of the equity accounts
 Summarizes the equity transactions with the owners of the
business that occurred during the year
 FORMS OF BUSINESS ORGANIZATIONS
1. Sole/ Single Proprietorship – a form of organization
where there is only one owner, the proprietor
Advantages Disadvantages
1. It is easy to organize. The government 1. Limited ability to raise capital
requirement is minimal. 2. Unlimited liability – business
2. Fast decision-making, as they are creditors can go after his personal
made by the owner himself assets to satisfy their claims
3. Financial operations are not 3. Limited ability to expand
complicated as this form is generally 4. Business is entirely a responsibility of
for small-scale business the owner
4. The owner is entitled to all the profits 5. Net income is subject to tax
his business realizes. regardless of whether it is withdrawn
or not.
 Statement of Changes in Equity for a Sole
Proprietorship
ABC Company
Statement of Changes in Equity
For the period ended December 31, 2016

Owner, Capital, January 1, 2016 xxx

Add: Net income xxx
Owner’s contribution xxx
Less: Drawings xxx
Net Loss xxx
Owner, Capital, December 31, 2016 xxx
 FORMS OF BUSINESS ORGANIZATIONS

2. Partnership – is an association of two or more

persons who bind themselves to contribute money,
property, or industry to a common fund, with the
intention of dividing profits among themselves
- are governed by the provisions of the
Civil Code, Articles 1767 to 1867
 FORMS OF BUSINESS ORGANIZATIONS
** Articles of Co-Partnership - the contract between the partners.
It contains the following:
1. Name of the partnership
2. Names of the partners
3. Place of business
4. Effective date of the partnership
5. Nature of business
6. Investment of each partner and corresponding capital credit
7. Duration of the contract
8. Rights, powers, and duties of the partners
9. Accounting period
10. Manner of dividing profits and losses
11. Liabilities of the partners for partnership debts
12. Compensation for services offered by partners
13. Treatment of partners’ additional investments and withdrawals
14. Procedures for settlement of partner’s interest upon dissolution of partnership
15. Provision for settlement of disputes
 FORMS OF BUSINESS ORGANIZATIONS
CLASSES OF PARTNERS

Based on their contribution:

a. Capitalist partner – contributes money or property to
the capital of the partnership
b. Industrial partner – contributes his work, labor or
industry to the partnership
c. Capitalist-industrial partner – contributes money or
property as well as his work or industry to the capital of
the partnership
 FORMS OF BUSINESS ORGANIZATIONS

CLASSES OF PARTNERS (cont’d)

Based on their liability for partnership debts:

a. General partner – one who is liable for partnership
debts to the extent of his personal property after
partnership assets are exhausted
b. Limited partner – one whose liability for partnership
debts is limited to his capital contribution
 FORMS OF BUSINESS ORGANIZATIONS
Partnership (cont’d)
Advantages Disadvantages
1. Easy to form, subject to less 1. Partners have unlimited liability for
government requirements partnership debts.
2. Flexibility of operations, its choice of 2. It has limited life because it can easily
activities is not subject to so many be dissolved.
restrictions 3. Limited ability to raise capital, depends
3. Expected to be operated more on how much can be contributed and/
efficiently because of the presence of or procured by the partners
more owners, “two heads are better 4. Net income is subject to tax whether
than one” distributed or not.
4. Partners are expected to have great
interest in the operations of the
partnership
Statement of Changes in Equity for Partnership

The DEF Partnership was established in 2015. The partners, Diana,

Emina and Fanny have January 1, 2016 outstanding capital balances of P
25,600, P 43,800 and P 37,655, respectively. Diana contributed P 15,000
during 2016. Emina and Fanny also contributed P 10,000 each in 2016.
The 2016 year end balances of each partner’s Drawings account are as
follows: Diana 12,000, Emina 15,000 and Fanny 14,000.
The partnership reported 2016 net income of P 75,650. According to the
partnership agreement, the partners’ profit sharing ratio is 30%, 40% and
30% for Diana, Emina and Fanny.
 Statement of Changes in Equity for Partnership

DEF Partnership
Statement of Changes in Equity
For the year ended December 31, 2016
Diana, Capital Emina, Capital Fanny, Capital Total
Balance, January 1, 2016 25,600 43,800 37,655 107,055
Add:
Partner’s contributions 15,000 10,000 10,000 35,000
Net Income 22,695 30,260 22,695 75,650
Less: Drawings 12,000 15,000 14,000 41,000
Balance, December 31, 2016 51,295 69,060 56,350 176,705
 FORMS OF BUSINESS ORGANIZATIONS
3. Corporation – is an artificial being created by operation of law, having the
right of succession and the powers, attributes and properties expressly
authorized by law or incident to its existence
- Private corporations are governed by the Corporation Code of the
Philippines, per Batasang Pambansa Blg. 68
- a legal or juridical person with a personality separate from its individual
stockholders or members.
- has the right to continuous existence irrespective of death, withdrawal,
insolvency, or incapacity of the individual members or stockholders and
regardless of the transfer of their interests or shares of stock.
 FORMS OF BUSINESS ORGANIZATIONS
Components of a Corporation
Corporators – refers to all the persons composing a corporation whether they are stockholders (in the
case of stock corporations) or members (in the case of non-stock corporations)
Incorporators – refers to corporators who are mentioned in the articles of incorporation as originally
forming and composing the corporation and who executed and signed the articles of incorporation -
not less than five (5) but not more than fifteen (15)
Stockholders – refers to natural or juridical persons who own at least one (1) share of the capital stock
of a corporation
Members – the corporators in a non-stock corporation
Board of Directors or Trustees – the governing body in a corporation, has the sole authority to
determine policy and conduct the ordinary business of the corporation within the scope of its charter.
For non-stock corporations, the body is usually called the Board of Trustees.
 FORMS OF BUSINESS ORGANIZATIONS

Promoters – sell the idea of forming a corporation to other people who may agree to become
incorporators and/ or provide capital, rights and property necessary to achieve the corporate
purpose/s.
Organization Costs – the costs incurred in corporate formation
Articles of Incorporation - a set of formal documents filed with a government body to legally
document the creation of a corporation, must contain pertinent information such as the firm’s
name, street address, agent for service of process, and the amount and type of stock to be
issued. Articles of incorporation are also referred to as the "corporate charter," "articles of
association" or "certificate of incorporation.“
Securities and Exchange Commission (SEC) – has the absolute jurisdiction, supervision,
and control over all corporations, partnerships, or associations, who are the grantees of
primary franchises and/ or licenses or permits issued by the government to operate in the
Philippines.
 FORMS OF BUSINESS ORGANIZATIONS

Corporations (cont’d)
Advantages Disadvantages
1. Capacity as a legal entity 1. Subject to more governmental
2. Shareholders’ personal assets are requirements
protected 2. Activities limited by the articles of
3. Wider source of capital incorporation and corporate by-laws
4. Corporate tax treatment 3. Possibility of abuse of power by officers
5. Limited liability of stockholders for 4. More paperwork and record-keeping
corporate debts because of regulations
6. Practically unlimited life
 Statement of Changes in Equity for
Corporation

GHI Incorporated was established in 2015. The corporation issued 10,000,

P10 par value shares of stock at an issue price of P20 per share. On July 15, 2016,
the corporation issued 1,000 new shares at an issue price of P25 per share.
The corporation reported net income of P 56,785 and P 65,870 in 2015 and
2016 respectively. Dividends of P 2.15 per share were declared and distributed to
shareholders on February 1, 2016. There were no dividends distributed on the
first year of operations of the corporation.
 Statement of Changes in Equity for
Corporation
GHI Incorporated
Statement of Changes in Equity
For the Year Ended December 31, 2016
Additional Paid-inRetained
Capital Stock Capital Earnings Total
Balance, January 1, 2016 100,000 100,000 56,785 256,785
Add: Issuance of shares 10,000 15,000 25,000
Net Income 65,870 65,870
Less: Dividends (21,500) (21,500)
Balance, December 31, 2016 110,000 115,000 101,155 326,155
 4. COOPERATIVES
Cooperatives operate similar to a corporation. It has
its Board of Directors who are selected from among its
members. However, while number of voting shares in a
corporation is based on shareholdings, in a cooperative,
it is on a “one-man, one-vote” basis. Moreover,
patronage refund is given to cooperative members who
patronize their business activities.
 Preparation of Statement of Changes in
Equity

The form of business organization determines the equity

accounts reported on the financial statements. The forms 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.