Module 5 - Statement of Changes in Equity PDF

Prepared by: ABEJAY H.
SELDA, CPA__
E-mail Address: _abejay.selda@clsu2.edu.ph________
Central Luzon State University

Science City of Muñoz 3120
Nueva Ecija, Philippines
Instructional Module for the Course

ACCTG 3100 LEC AND LAB / Intermediate Accounting 3
Module 5
Topic 5 Statement of Changes in Equity
Overview
This module introduces the learner to the presentation of the statement of
changes in equity. This module develops the learner’s understanding of the
requirements through the use of example and indicates significant standards that
are required in presenting a statement of changes in equity and retained earnings.
Furthermore, the module includes questions and problems designed to test the
learner’s knowledge of the requirements and to develop the learner’s ability to
present a statement of changes in equity and statement of retained earnings
I. Objectives
At the end of this module, the learners are expected;
 To understand the concept of equity
 To know the preparation of the statement of changes in equity
 To identify the components of equity
 To identify the items directly affecting retained earnings
II. Learning Activities

ACCTG 3100/ INTERMEDIATE ACCOUNTING 3
Equity
Equity is defined as the residual interest in the assets of an entity after deducting
all of the liabilities.
In other words, equity is the equivalent of net assets, meaning total assets
minus total liabilities.
Although equity is defined as residual, it may be subclassified in the statement of

financial position.
In a corporate equity, the following subclassifications may be shown separately:
a. Share capital – funds contributed by shareholders equal to the par or stated

value
b. Share premium – funds contributed by shareholders in excess of par or stated

value
c. Retained earnings – which may be unappropriated and appropriated.
The holders of instruments classified as equity are simply known as “owners”.
Statement of changes in equity
The statement of changes in equity is a formal statement that shows the

movements in the elements or components of the shareholder’s equity.
An entity shall present a statement of changes in equity showing:
1. Comprehensive income for the period.
2. For each component of equity, the effects of changes in accounting policies

and correction of errors.
3. For each component of equity, a reconciliation between the carrying amount

at the beginning and end of the period, separately disclosing changes from:
a. Profit or loss
b. Each item of other comprehensive income
c. Transactions with owners in their capacity as owners showing separately

contributions by and distributions to owners.
Page 2 of 7
Statement of Retained Earnings
The statement of retained earnings shows the changes affecting directly the
retained earnings of an entity.
The statement of retained earnings is now a part of the statement of changes in

equity.
The important data affecting the retained earnings that should be clearly
disclosed in the statement of retained earnings are:
a. Net income or loss for the period
b. Prior period errors
c. Dividends declared and paid to shareholders
d. Effect of change in accounting policy
e. Appropriation of retained earnings
Page 3 of 7
Items directly affecting retained earnings
Net income or loss for the period – Net income is added because it increases
retained earnings and net loss is deducted because it decreases retained
earnings.
Prior period errors – The prior period errors are shown as adjustment of the
beginning balance of retained earnings to arrive at the corrected beginning
balance.
If the net income of the prior period is understated, the amount of error is
added to retained earnings. If the net income of the prior period is
overstated, the amount of the error is deducted from retained earnings.
Dividends declared and paid to shareholders – The dividends declared or paid

during the year shall be deducted from the retained earnings.
Effect of change in accounting policy – This is shown as adjustment of the

beginning balance of retained earnings.
If the net income of prior period is understated because of change in

accounting policy, the effect is added to the beginning retained earnings.
If the net income of prior period is overstated because of change in accounting

policy, the effect is deducted to the beginning retained earnings.
Retained earnings Appropriated
The amount of appropriation is deducted from the unappropriated balance of

retained earnings.
Conversely, if the appropriation is subsequently canceled, it is reverted or added

back to the unappropriated balance.
Retained earnings may be appropriated for the following reasons:
a. Legal requirement, as in the case of treasury shares
b. Contractual requirement, as in the case of bond redemption
c. Entity policy, as in the case of an appropriation for contingencies
Page 4 of 7
III. Assessment:
Theory: Write your answer in yellow paper.
1. Explain the term equity

2. Define a statement of changes in equity.
3. What are the items presented in the statement of changes in equity?
4. Define a statement of retained earnings
5. What are the items directly affected retained earnings?
Page 5 of 7
Problems: Write your answer and solutions to yellow paper.
1. Prepare a statement of retained earnings for 2019
2. Prepare comparative statement of income and retained earnings.
Page 6 of 7
3. Prepare a statement of changes in equity for the year ended December 31,
2019
Deadline: October 28, 2020, Wednesday at 5pm. Send your activity to the
representative of the class.
References: Financial Accounting 3 by: Valix 2019 edition
Page 7 of 7

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Prepared by: ABEJAY H.

Central Luzon State University

Instructional Module for the Course

At the end of this module, the learners are expected;

 To understand the concept of equity

 To know the preparation of the statement of changes in equity

 To identify the components of equity

 To identify the items directly affecting retained earnings

II. Learning Activities

Although equity is defined as residual, it may be subclassified in the statement of

In a corporate equity, the following subclassifications may be shown separately:

a. Share capital – funds contributed by shareholders equal to the par or stated

b. Share premium – funds contributed by shareholders in excess of par or stated

c. Retained earnings – which may be unappropriated and appropriated.

The holders of instruments classified as equity are simply known as “owners”.

Statement of changes in equity

The statement of changes in equity is a formal statement that shows the

An entity shall present a statement of changes in equity showing:

1. Comprehensive income for the period.

2. For each component of equity, the effects of changes in accounting policies

3. For each component of equity, a reconciliation between the carrying amount

b. Each item of other comprehensive income

c. Transactions with owners in their capacity as owners showing separately

Statement of Retained Earnings

The statement of retained earnings is now a part of the statement of changes in

a. Net income or loss for the period

b. Prior period errors

c. Dividends declared and paid to shareholders

d. Effect of change in accounting policy

e. Appropriation of retained earnings

Items directly affecting retained earnings

Dividends declared and paid to shareholders – The dividends declared or paid

Effect of change in accounting policy – This is shown as adjustment of the

If the net income of prior period is understated because of change in

If the net income of prior period is overstated because of change in accounting

Retained earnings Appropriated

The amount of appropriation is deducted from the unappropriated balance of

Conversely, if the appropriation is subsequently canceled, it is reverted or added

Retained earnings may be appropriated for the following reasons:

a. Legal requirement, as in the case of treasury shares

b. Contractual requirement, as in the case of bond redemption

c. Entity policy, as in the case of an appropriation for contingencies

Theory: Write your answer in yellow paper.

1. Explain the term equity

Problems: Write your answer and solutions to yellow paper.

1. Prepare a statement of retained earnings for 2019

2. Prepare comparative statement of income and retained earnings.

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