CHAPTER 3

STATEMENT OF CHANGES IN EQUITY

 A reconciliation of the beginning and ending balances in a company’s equity during a

reporting period

CAPITAL

DRAWINGS BEGINNING

NET LOSS INVESTMENT

NET INCOME

END

FORMS OF BUSINESSES

 Sole Proprietorship

o A business owned by one person

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o Simple and easy to set up
o Least costly among all forms

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o Owner has sole control over the enterprise

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o There is no distinction between the owner and the enterprise

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o Owner has unlimited liability
o (Has one capital only)
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EXAMPLE:

Friendly Convenience Store: Sole Proprietorship

o

Juana Dela Cruz is the owner of the Friendly Convenience Store. The store was
established on January 1, 20X0. Juana deposited P10,000 to a bank account in the name of
aC s

Friendly Convenience Store. She made three more deposits of P2,500 each during the year
vi y re

from her personal account. The store generated net income of P35,670 in 20X0. Juana
regularly withdraws P1,000 per month from the store’s bank account for her personal
expenses.
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1. Determine the 20X0 year-end balance of the Juana Dela Cruz, drawings account.
ar stu

2. Prepare a Statement of Changes in Equity for the year ended December 31, 20X0.

ANSWER:
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1. P12,000 – Sabi sa problem “Juana regularly withdraws P1,000 per month from the
store’s bank account for her personal expenses.” So ang total drawings niya is
Th

computed as 1,000 x 12 months.

2. Statement of Changes in Equity
Friendly Convenience Store
Statement of Changes in Equity
sh

For the year ended December 31, 20X0

Juana Dela Cruz, Capital, Janury 1, 20X0 0
Add:
Owner’s contributions (10,000+7,500) 17,500
Net Income 35,670
Less:
Drawings (1,000x12) (12,000)
Juana Dela Cruz, Capital, December 31, 20X0 41,170

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 SOLUTION (T-ACCOUNT)

Juana, Capital

(1,000x12) 12,000 0

10,000

7,500 (2,500x3)

35,670

41,170

 Partnership
o Two or more persons bind themselves into a contract to contribute money, property or
services in a common venture with the intention of dividing the profits among
themselves

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o The partnership has its own legal personality distinct and separate from its
individual members (Economic Entity Principle)

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o Partners have unlimited liability (unless the partner is a limited partner)

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o There is a risk of disagreements among partners

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o Each partner is an agent of the partnership and is liable for the actions made by

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other partners (“jointly and severally”/”solidary” liable
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TYPES OF PARTNERSHIP (based on LIABILITY)

GENERAL
o

o Composed of partners who are liable individually and collectively to all those who
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have claims against them

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o Claimants can run after all the personal assets of all the partners

LIMITED

o Consists of partners who have limited liabilities and others who have unlimited
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liabilities.
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o A limited partner is NOT personally liable for the obligations of the partnership
beyond his or her prorated capital contribution to the partnership.
o The law requires that there must be at least ONE general partner in a limited
partnership
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EXAMPLE
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The DEF Partnership was established in 20X0. The partners Diana, Emina and Fanny have
January 1,20X1 outstanding capital balances of P25,600, P43,800 and P37,655,
respectively. Diana contributed P15,000 during 20X1. Emina and Fanny also contributed
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P10,000 each in 20X1. The 20X1 year end balances of each partner’s Drawings account are
as follows:

Diana – P12,000

Emina – P15,000

Fanny – P14,000

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 The Partnership reported 20X1 net income of P75,650. According to the partnership
agreement, the partner’s profit sharing ratio is 30%, 40% and 30% for Diana, Emina and
Fanny.

Prepare the 20X1 SoCE of DEF Partnership.

DEF Partnership

Statement of Changes in Equity

For the year ended December 31,20X1

Diana, Capital Emina, Capital Fanny, Capital Total

Balance, January 1, 20X1 25,600 43,800 37,655 107,055

Add:

Partner’s Contribution 15,000 10,000 10,000 35,000

Net Income 22,695 30,260 22,695 75,650

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Less:

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Drawings (12,000) (15,000) (14,000) (41,000)

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Balance, December 31,20X1 51,295 69,060 56,350 176,705

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EXPLANATION:

 Beginning Balance? Given.

 Partner’s Contribution? Given.
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 Net Income? Nakuha siya based sa profit sharing ratio nila.

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Sabi sa problem, “According to the partnership agreement, the partner’s profit sharing
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ratio is 30%, 40% and 30% for Diana, Emina and Fanny.”

Since ang total net income ng partnership for the year 20X1 ay 75,650, eto yung amount na
paghahatian nila base sa ratio/percent nila.
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So pano makuha?
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Keep in mind na 100% lagi yung total. So yung 75,650 is 100%.

Magagamit mo din dito yung formula ng percentage, rate at base. Imagine si 75,650 yung base
is

at yung rate is yung ratio nila. Percentage ang hinahanap natin, meaning yung part nila ang
sinosolve natin so base times rate lang yan.
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sh

For Diana, 30% ng 75,650 ang parte niya. So 75,650 x .30 = 22,695
For Emina, 40% ng 75,650 ang parte niya. So 75,650 x .40 = 30,260
For Fanny, 30% lang din ang part niya. So same lang sila ni Diana, 22,695
 Drawings? Given.
 Ending Balance? Compute mo lang isa isa.

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 PERO WHAT IF ANG PROFIT SHARING RATIO AY HINDI GIVEN? AT SINABI SA PROBLEM NA ANG RATIO NILA AY
NAKABASE OR NAKADEPENDE SA KUNG ANO LANG YUNG NAIAMBAG NILA?

DIANA

So for Diana, ang beginning balance niya ay 25,600 at ang total beginning balance ng partnership
nila ay 107,055.

Maaapply din dito yung PRB formula.

25,600 yung part ni Diana, this will serve as your percentage. Yung 107,055 naman yung base, kasi
yun yung total. So ang hinahap natin is yung rate ni Diana (or yung ratio niya).

To solve for rate, percentage divided by base.

25,600/107,055 = 0.23912942

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After this, para makuha mo naman yung part niya sa net income. I-times mo agad yung rate/ratio

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niya sa total net income. Wag mo iround off yung rate kasi di na magiging sakto yung sagot.

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0.23912942 x 75,650 = 18,090.1406 or 18,090.14 (eto pwede na i-round off) so ayan na yung net

o.
income ni Diana.

Do the same kay Emina and Fanny. rs e

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EMINA
o
aC s

43,800/107,055 = 0.40913549
vi y re

0.40913549 x 75,650 = 30,951.0999 or 30,951.10

FANNY
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37,655/107,055 = 0.35173509

0.35173509 x 75,650 = 26,608.7595 or 26,608.76

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Pwede mo i-total, to check kung sakto bang 75,650 yung tatlong net income. Kasi dapat sakto yan
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syempre.

18,090.14 + 30,951.10 + 26,608.76 = 75,650

sh

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 DEF Partnership

Statement of Changes in Equity

For the year ended December 31,20X1

Diana, Capital Emina, Capital Fanny, Capital Total

Balance, January 1, 20X1 25,600 43,800 37,655 107,055

Add:

Partner’s Contribution 15,000 10,000 10,000 35,000

Net Income 18,090.14 30,951.10 26,608.76 75,650

Less:

Drawings (12,000) (15,000) (14,000) (41,000)

Balance, December 31,20X1 51,295 69,060 56,350 176,705

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 Corporation

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o A business organization that has a separate legal personality from its owners.

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o Can be formed or incorporated by, at least five, or at most 15 natural persons. The

o.
majority of the incorporators must be residents of the Philippines (Law on

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Partnership and Corporation)
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o Once established, there is no limit to the number of natural or juridical persons who
can invest in the corporation
o Owners (stockholders) enjoy limited liability by have limited involvement in the
company’s operations
o

o The Board of Directors, an elected group of stockholders, controls the activities of

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the corporation
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Paid-in capital

o The amount of contributions given or will be given to the corporation in

exchange for its common stocks
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Capital Stock

o Reflects the par value of the issued common shares.

o Par value – the minimum price by which corporations can issue stocks to
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shareholders
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Additional Paid-in Capital

o The excess of the issue price over the par

Retained Earnings
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o Undistributed earnings of the corporation

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 EXAMPLE

GHI Incorporated was established in 20X0. The corporation issued 10,000, P10 par
value shares of stock at an issue price of P20 per share. On July 15, 20X1, the
corporation issued 1,000 new shares at an issue price of P25 per share.

The Corporation reported net income of P56,785 and P65,870 in 20X0 and 20X1,
respectively. Dividends of P2.15 per share were declared and distributed to
shareholders on February 1, 20X1. There were no dividends distributed on the first
year of operations of the corporation.

Prepare the 20X1 Statement of Changes in Equity of GHI Incorporated.

GHI Incorporation

Statement of Changes in Equity

For the year ended December 31, 20X1

Capital Stock APIC Retained Earnings Total

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Balance, January 1, 20X1 100,000 100,000 56,785 256,785

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Add:

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Issuance of Shares 10,000 15,000 25,000

o.
Net Income 65,850 65,850
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Less:

Dividends (23,650) (23,650)

o

Balance, December 31, 20X1 110,000 115,000 99,005 324,005

aC s
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S O L U T I O N

BEGINNING BALANCE – CS & APIC?

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Given (for beginning):

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Shares Issued = 10,000

Issue Price = 20/share

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Par Value = 10/share

APIC = 10 (Issue Price – Par Value) “residual value”

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Journal Entry Computation

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January 1, 20X1 Cash 200,000 Shares Issued x Issue Price

Ordinary Shares 100,000 Shares Issued x Par Value

APIC – OS 100,000 Shares Issued x APIC

(Ang entry na ‘to ay para sa beginning balance. Ang need mo lang naman dito ilagay sa table ay
yung beginning balance ng ordinary shares (capital stock) at APIC-OS)

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 ISSUANCE OF SHARES – CS & APIC?

Given (for the next issuance/July 15):

Shares Issued = 1,000

Issue Price = 25/share

Par Value = 10/share

APIC = 15 (Issue Price – Par Value) “residual value”

Journal Entry for July 15, 20X1 Computation

July 15, 20X1 Cash 25,000 SI x IP (1,000 x 25)

Ordinary Shares 10,000 SI x PV (1,000 x 10)

APIC – OS 15,000 SI x APIC (1,000 x 15)

(Yung amount ng OS at APIC dito yung ilalagay sa issuance of shares, meaning eto yung in-issue
during the year)

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RETAINED EARNINGS AND NET INCOME? Given. (“The Corporation reported net income of P56,785 and

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P65,870 in 20X0 and 20X1, respectively”)

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DIVIDENDS?

Given:
o

Dividend per share = P2.15/share

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Since merong 10,000 shares issued nung simula nng year at merong 1,000 shares issued nung July,
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may total 11,000 shares issued sa buong year 20X1.

So, to compute for the toral dividends imumultiply mo lang yung number of stocks issued sa buong
year by dividend per share.
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11,000 x 2.15 = 23,650 (dividends for 20X1)

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ENDING BALANCE? Just compute.

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ADDITIONAL INFORMATION:

 Retained Earnings
- Appropriated (restricted)
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For daily operations, hindi pwedeng galawin

- Unappropriated (unrestricted)
Dividend payments
 Dividends Three Dates to Remember:
1. Declaration
2. Record
3. Payment

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