STATEMENT OF CHANGE IN EQUITY DEFINITION

SOCE stands for Statement of Changes in Equity. It is a financial statement that shows the changes in a company’s equity over a specific period. The SOCE details how equity is affected by various factors such as profits, losses, dividends, and other changes in capital contributions or withdrawals by the owners.

Key components of the SOCE include:

Beginning Equity – The equity balance at the start of the period.
Net Income or Loss – The profit or loss for the period (from the Statement of Comprehensive Income).
Dividends – Payments made to shareholders (if any).
Owner Contributions or Withdrawals – Additional capital contributions by the owner or withdrawals.
Other Comprehensive Income – Changes in equity from items not recognized in profit or loss (e.g., revaluation of assets, currency translation differences).
Ending Equity – The equity balance at the end of the period.
The SOCE helps stakeholders understand the factors contributing to the change in the owner's or shareholders' equity throughout the reporting period.

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3. LEARNING OBJECTIVES 7/24/2019 Fundamentals of Accountancy, Business and Management 2 3 By the end of the chapter, the student should be able to: understand the purpose of the Statement of Changes in Equity; appreciate that the presentation of the Statement of Changes in Equity is dependent on the form of business organization; identify the elements of the Statement of Changes in Equity; determine the nature of the different equity accounts used by corporations; and prepare a Statement of Changes in Equity.

4. The SoCE is prepared to meet the requirements of the readers to understand the transactions that caused the movements in equity accounts. The SoCE is a statement dated “for the year ended”. The report shows a reconciliation of the beginning and ending balances of the equity accounts. It summarizes the equity transactions with the owners of the business that occurred during the year 7/24/2019 Fundamentals of Accountancy, Business and Management 2 4

5. Balance, January 1, 2017 Equity transactions with owners P 100,000.00 Balance, December 31, 2017 P 150,000.00 Objective of Statement of Changes in Equity 7/24/2019 Fundamentals of Accountancy, Business and Management 2 5

6. There are three basic forms of business organizations, namely; (1) sole proprietorship, (2) partnership, and (3) corporation. They differ in terms of number of owners, legal personality of the business, and ease of transferability of ownership. 7/24/2019 Fundamentals of Accountancy, Business and Management 2 6

7. The simplest form of business organization. There is only one owner referred to as sole proprietor. Oftentimes, the owner is also the manager. The business has no legal personality separate from its owner. Fundamentals of Accountancy, Business and Management 2 7/24/2019 7

8. 7/24/2019 In the eyes of the law, the business and the owner is one entity. For example, the business and the owner are taxed as one. Also, the claim of the creditors of the business extends to the personal assets of the owner. As a result, raising capital for the business is constrained to the owner’s resources and credit s t a Fun d n a m e d n t a i ls n o f A c g c o u . n t a n c y , Business and Management 2 8

9. A business owned by two or more owners called partners. They pool their together such as money, property and industry, to operate a business and divide the profit among themselves. 7/24/2019 Fundamentals of Accountancy, Business and Management 2 9

10. Partners are generally involved in the management of the business. The agreement of the partners is stated in the contrast of partnership specifically, the partners’ profit and loss sharing arrangements. 7/24/2019 Fundamentals of Accountancy, Business and Management 2 10

11. The most complex form of business organization. Owned by many owners called stockholders or shareholders. Ownership is divided into common stocks or shares. One shareholders can own many stocks. 7/24/2019 Fundamentals of Accountancy, Business and Management 2 11

12. 7/24/2019 The Corporation Code governs all corporations in the Philippines. Corporations are registered with the Securities and Exchange Commission (SEC). Some corporations are listed in the Philippine Stock Exchange (PSE). This means PSE provides a platform where investors can buy and sell stocks of listed c orp o r a F u t n d i a o me n n t als s o f A . c c ou n t a n c y , Business and Management 2 12

13. 7/24/2019 One of the characteristics of a corporation is the separation of ownership and management. Shareholders invest their funds and the corporations is managed by professional managers. Stockholders have limited liability. Creditors of corporation only have claims to the corporation’s assets. A corporation is a legal entity separate from its o wn e Fu n r d a m s e n . t als of Accountancy, Business and Management 2 13

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15. The form of business organization determines the equity accounts reported on the financial statements. As we have reviewed, the form 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. 7/24/2019 Fundamentals of Accountancy, Business and Management 2 15

16. The SFP and SoCE will present one capital account because there is only one owner. The owner’s capital account follows this naming convention: <Owner’s name>, Capital. If the name of the sole proprietor is Juan Dela Cruz, then the name of the account is Juan Dela Cruz, Capital. The owner’s Capital account has a normal credit balance. 7/24/2019 Fundamentals of Accountancy, Business and Management 2 16

17. Accountants use the owner’s Drawings account to record withdrawals of the owner. The Drawings account follows the naming convention for Capital: <Owner’s name>, Drawings. Entries to this account decrease equity. It is closed at the end of the year to the Capital account. It is a nominal account with a normal debit balance. 7/24/2019 Fundamentals of Accountancy, Business and Management 2 17

18. Drawings Debit Credit Beg balance Withdrawals xxx End balance xxx xxx Closing Final balance Owner, Capital Debit Credit xxx Beg Balance xxx contribution xxx net income Withdrawals xxx xxx End balance Account of Owner’s Capital The owner’s Capital account tracks the following transactions of the owner: (1) capital contributions; (2) withdrawals; and (3) net income or net loss generated by the business. 7/24/2019 Fundamentals of Accountancy, Business and Management 2 18

19. Why is net income closed to the capital account? Consider this: (a) the net income generated from the operations of the business is owned by the owner, and (b) the capital account represents the part of the business that belongs to the owners. Therefore, the net income that belongs to the owner should be included in his capital account. 7/24/2019 Fundamentals of Accountancy, Business and Management 2 19

20. The SoCE of a sole proprietorship is basically a summary of the owner’s capital account. The bottom- line of the SoCE is reported as equity in the SFP. 20 7/24/2019 Liabilities and Equity F p u n o d a r m t e i n o t a n ls o f o A f c c o t u h n t a e n c y S , B t u a s i n t e e s s m a n d e M n a n t a g o e m f e n F t i 2 n a nc i a l Position

21. Friendly Convenience Store: Sole Proprietorship Juana Dela Cruz is the owner of the Friendly Convenience Store: The store was established on January 1, 2018. Juana deposited P 10,000.00 to a bank account in the name of Friendly Convenience Store. She made three more deposits of P 2,500.00 each during the year form her personal account. The store generated net income of P 35,670.00 in 2018. Juana regularly withdraws P 1,000.00 per month from the store’s bank account for her personal expenses. Determine the 2018 year- end balance of the Juana Dela Cruz, Drawings account. Prepare a Statement of Changes in Equity for the year ended December 31, 2018. 7/24/2019 Fundamentals of Accountancy, Business and Management 2 21

22. Friendly Convenience Store: Sole Proprietorship Juana Dela Cruz is the owner of the Friendly Convenience Store: The store was established on January 1, 2018. Juana deposited P 10,000.00 to a bank account in the name of Friendly Convenience Store. She made three more deposits of P 2,500.00 each during the year form her personal account. The store generated net income of P 35,670.00 in 2018. Juana regularly withdraws P 1,000.00 per month from the store’s bank account for her personal expenses. Determine the 2018 year- end balance of the Juana Dela Cruz, Drawings account. Prepare a Statement of Changes in Equity for the year ended December 31, 2018. 7/24/2019 Fundamentals of Accountancy, Business and Management 2 22

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24. A partnership is owned by two or more partners. Our objective is to account for the equity of each partner. Therefore, we need more than one capital account. As a matter of fact, the number of capital accounts that will be reported on the SoCE and the SFP is equal to the number of partners. Similar to the capital account used in sole proprietorships, each partner’s capital account will track his contributions to the business, his share in the net income and his drawings. 7/24/2019 Fundamentals of Accountancy, Business and Management 2 24

25. A Drawings account is also maintained for each partner. The naming convention for both the capital and drawings accounts is the same as in sole proprietorship. 7/24/2019 Fundamentals of Accountancy, Business and Management 2 25 Recall How do we determine the amount of net income that will be closed to each partner’s capital account? Accountants call this process “allocation of net income.” Net income is allocated based on the profit and loss sharing agreement stipulated in the partnership contract. Allocation of net income is unique only to partnership.

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27. PARTNERSHIP The DEF Partnership was established in 2017. The partners, Diana, Emina and Fanny have January 1, 2018 outstanding capital balances of P 25,600.00, P 43,800.00 and P 37,655.00 respectively. Diana contributed P 15,000.00 during 2018. Emina and Fanny also contributed P 10,000.00 each in 2018. The 2018 year end balances of each partner’s Drawings account are as follows: Diana P 12,000.00, Emina P 15,000.00 and Fanny P 14,000.00. The partnership reported 2018 net income of P 75,650.00. According to the partnership agreement, the partner’s profit sharing ratio is 30%, 40% and 30% for Diana, Emina and Fanny. Prepare the 2018 SoCE of DEF Partnership. 7/24/2019 Fundamentals of Accountancy, Business and Management 2 27

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29. A corporation is owned by many stockholders that could number to thousands. Moreover, the ease of transferring ownership in corporations results in fast turnover of owners. If we maintain one capital account for each stockholder, we will end up with thousands of capital accounts. The fast turnover of owners will mean accountants will be faced with the voluminous and unending job of opening, transferring and closing capital accounts. Mores so, we are faced with the problem of allocating the corporation’s net income to the thousands of fast moving shareholders. 7/24/2019 Fundamentals of Accountancy, Business and Management 2 29

30. The solution to these issues is simple. We will not maintain a capital account for each shareholder. As a result, there is no need to allocate net income to the thousands of shareholders. We introduce three new equity accounts, namely, capital stock, additional paid in capital and retained earnings. We remain focused on only three equity transactions – capital contribution, drawings and accumulation of net income. 7/24/2019 Fundamentals of Accountancy, Business and Management 2 30

31. The stockholders’ equity of a corporation is divided into two parts, namely, paid in capital and retained earnings. Paid- in capital is the most of contributions given or will be given to the corporation in exchange for its common stocks. The balance of Capital Stock reflects the par value of the issued common shares. Par value is the minimum price by which corporations can issue stocks to shareholders. However, corporations generally issue stocks in exchange for an amount greater than par. The excess of the issue price over the par is reported as Additional Paid- In Capital . 7/24/2019 Fundamentals of Accountancy, Business and Management 2 31

32. The second half of the stockholders’ equity is the Retained Earnings. This accounts reports the undistributed earnings of the corporation. The balance of retained earnings is computed as follows: net income minus net losses and dividends from the date of incorporation up to the cut- off or date of SFP. Dividends are distribution to stockholders, similar to owners’ drawings in sole proprietorship and partnership. Dividends are deducted from retained earnings because dividends are taken from income generated by the corporation. 7/24/2019 Fundamentals of Accountancy, Business and Management 2 32

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35. CORPORATION GHI Incorporated was established in 2018. The corporation issued 10,000. P 10 par value shares of stock at an issue price of P 20 per share. Only July 15, 2019, the corporation issued 1,000 new shares at an issue price of P 25 per share. The corporation reported net income of P 56,785 and P 65,870 in 2018 and 2019, respectively. Dividends of P 2.15 per share were declared and distributed to shareholders on February 1, 2019. There were no dividends distributed on the first year of operations of the corporation. Prepare the 2019 Statement of Changes in Equity of GHI Incorporated. 7/24/2019 Fundamentals of Accountancy, Business and Management 2 35

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