CHAPTER 6:
CORPORATE FORMATION AND SHAREHOLDER’S EQUITY
CORPORATION DEFINED:
 An artificial being created by
operation of law having the rights of
succession and the powers,
attributes and properties are
expressly authorized by the law or
incident to its existence.
(Sec.2 of RCC)
ATTRIBUTES OF A CORPORATION
1. Artificial Being
- It is separate and distinct
from its shareholders.
2. Perpetual Existence
- Exist for an indefinite period
of time.
3. Legal Personality
- Legally created by law
- A juridical person with rights,
powers and duties.
4. Corporate Ownership
- Interest and right over the
corporation is divided into
shares of stocks.
- Investor buys shares of
stocks to become
shareholder.
5. Limited Liability
- Shareholders are not
personally liable
corporate acts and debts.
6. Transferability of Interest
- Shareholder may transfer or
sold her share of stock
without prior consent to other
shareholders.
ADVANTAGES OF CORPORATION
1. Large amount of Capital
2. Has Limited Liability
3. Easy transferability of interests
4. Easy to form a corporation
especially by the small and
medium enterprise. (OPC)
5. Managed by team
professionals.
DISADVANTAGES OF
CORPORATION
1. Has tax liability of 20% on
shareholder’s income.
2. Subject to many legal
requirements.
3. Not all shareholders gave direct
or active control of the affairs and
business operations.
CORPORATE STRUCTURE
SHAREHOLDERS
 Owners of a corporation
 Have the ultimate control
over the corporation and
have a right to elect the
Board of Directors
BOARD OF DIRECTORS
 Responsible for the overall
supervision of the firm.
 Has the final authority on
policy making and control of
corporate activities.
a
PRESIDENT
 Responsible for
for implementing the policies
set up and the plans drawn
by the Board of Directors.
 Usually called the Chief
Executive Officer or CEO
and the other officer.
VICE PRESIDENT
 They are given specific
areas of responsibility as
managers of the following
department: production,
finance, marketing and
human resources.
of
 CHAPTER 6:
CORPORATE FORMATION AND SHAREHOLDER’S EQUITY
 Board of Trustees
- Same with BOD but in Non-stock
Corporation
 Member
- Owners of Non-stock Corporation
 Corporators
- Members of the corporation
that are entitled to enjoy the
benefits and rights of the
corporation.
- It may be a member or a
stockholder.
 Incorporators
- Incorporators are those who
started the corporation and
whose names are written in
the articles of incorporation.
- These are common when a
partnership decides to
dissolve and turn it into a
corporation.
KINDS OF CORPORATION
1. Private – one owned and
organized for a private purpose or
objective
a. Stock – privately owned and is
organized for the profit which
is distributed as dividends to
the owners. Ownerships is
sold in units called shares.
b. Non Stock – it is a nonprofit
organization. No shares of
stocks are distributed nor is
there profit distribution.
2. Public - a government corporation
organized for public functions.
3. Close - a family corporation,
stock is held by selected few and
not open to any person.
4. Open - stock is listed in the stock
market and can be purchase by
any person. (Publicly Held
Corporation)
KINDS OF STOCKS/SHARES
In order to be a shareholder, they need
to buy shares of stocks of the
corporation (this is their interest).
1. As to value:
a. Par Value Stock
- Fixed value stated in the
COS.
- Minimum basis for the
amount contribution of a
shareholder.
- Stock can only be issued at
par and above par, but never
below par.
- Serves as the basis for legal
capital.
b. No Par Value Stock
- No designated value in the
COS.
- Cannot be sold less than
P5.00
- Deemed fully paid and non-
assessable shares.
2. As to Right
a. Ordinary/Common Shares
- Entitles the owner to a pro
rata dividend without any
priority over any other
stockholders.
- Has voting rights
- Can be issued at par and no
par.
b. Preferred/Preference Shares
- Had preferential rights in
claims over the common
shares.
 Meaning it had priority
claims over dividend
distribution.
- Usually issued at par
- No voting rights but there are
exceptions where they can
vote (See Sec. 6)
 CHAPTER 6:
CORPORATE FORMATION AND SHAREHOLDER’S EQUITY
LEGAL CAPITAL
To protect the creditors, the law requires
a minimum permanent investment from
the shareholder.
 This represents the minimum
assets of the corporation which
cannot be distributed to the
shareholders in the lifetime of the
corporation
 Investment at PAR VALUE
represents legal capital.
 All proceeds (PIC) from the issue
of no par value shares are treated
as legal capital.
Trust Fund Doctrine
 It is a doctrine holding that
corporate assets are held as a trust
fund for the benefit of shareholders
and creditors and that corporate
officers have a fiduciary duty to
deal with them properly.
 Contributed capital of a corporation
constitute a trust fund to which
corporate creditors have a right for
satisfaction of their claims.
What constitutes Legal Capital?
 Aggregate of par value of all issued
par value shares
 Aggregate of the cash and the
value of any contribution paid for all
issued no par value shares
In the FS, Legal Capital consist of:
1. Share Capital
2. Subscribed Share Capital
3. Share Premium - can only be
included if it has a stated value,
dont include it if has par value.
4. Paid in Capital in excess of stated
Value.
RIGHTS OF SHAREHOLDERS
Based on the number of shares
purchased, the investors enjoy the ff.
rights:
1. Share in the corporate profits at
the discretion of the BOD. Except
for treasury shares.
2. Vote and attend annual
stockholders’ meeting. (Except
preferred shares, redeemable
shares and treasury shares.)
3. Share in the distribution of assets
upon liquidation.
4. Sell or dispose of their shares.
5. Receive the same dividends
given to all ordinary shareholders.
6. Receive timely financial reports
7. Purchases additional shares of
stocks whenever there is an
increase in the authorized capital
stock of the corporation. (Pre-
emptive right)
INCORPORATION REQUIREMENT
1. The law permits one or more
natural or juridical persons, but
not more than fifteen to form
Private Corporation. However,
the natural persons must be of
legal age and majority of them
must be resident of the
Philippines. (See Sec. 10)
2. There is no minimum capital
stock requirement for Stock
Corporation. But it is stated that
at least 25% of the authorization
capital stock must be subscribed
and at least 25% of these
subscription must be paid.
- The RCC does not mention
any minimum authorized
number of shares for as long
as the paid in capital is not
less than P 5,000.
ARTICLES OF INCORPORATION
(See Sec. 14)
1. Name of the Corporation
2. Specific purpose for which the
corporation is formed.
 CHAPTER 6:
CORPORATE FORMATION AND SHAREHOLDER’S EQUITY
3. Principal office of the
Corporation, which must be in the
Philippines.
4. Term of existence
5. Name, nationalities and
residence of incorporators.
6. The number of directors, which
shall not be more than fifteen.
7. The names, nationalities, and
residence addresses of persons
who shall act as directors or
trustees until the first regular
directors or trustees are duly
elected and qualified in
accordance with this Code;
8. If it be a stock corporation, the
amount of its authorized capital
stock, number of shares into
which it is divided, the par value
of each, names, nationalities, and
residence addresses of the
original subscribers, amount
subscribed and paid by each on
the subscription, and a statement
that some or all of the shares are
without par value, if applicable;
9. If it be a nonstock corporation,
the amount of its capital, the
names, nationalities, and
residence addresses of the
contributors, and amount
contributed by each; and
10. Such other matters consistent
with law and which the
incorporators may deem
necessary and convenient.
CORPORATE RECORDS
(See Sec. 74)
a.) Minutes of stockholders meeting
b.) Minutes of directors meeting
c.) Books of account where all
business transactions are
recorded
d.) Stockholders’ ledger where
shares issued for each
stockholder are recorded.
e.) Subscriber’s ledger where
subscription accounts for each
subscriber is recorded.
AUTHORIZED SHARE CAPITAL
 Represents the maximum
number of shares or amounts the
corporation is allowed to issue
stated in the AOI.
STOCK SUBCRIPTIONS
An agreement to purchase shares of
stocks:
 Number of shares being
subscribed,
 The subscription price,
 The terms of payment
 Call dates.
In the absence of FIXED CALL DATES,
payment is made upon call by the BOD.
SHARE CAPITAL
 Represents the amount paid in by
the shareholders whether in cash,
property or service and for which
a certificate of stock is issued as
evidence of stock ownership.
CERTIFICATE OF STOCKS
 A written acknowledgment by the
corporation of the shareholder’s
interest in the corporation and its
net assets.
 Stock certificates enhance
ownership over the shares of
stock.
 Subscriber is not entitled
to certificate unless the
 CHAPTER 6:
CORPORATE FORMATION AND SHAREHOLDER’S EQUITY
subscription is been fully
paid.
 However, partial payments
may be issued a
certificate, at the option of
the BOD by applying the
payments based on the
par value of a share of
stock. (See example in
page 150)
ORGANIZATION EXPENSE
 These are called organization
costs or pre-incorporation costs
and are to be recorded as
organization expenses.
SELLING OR ISSUING SHARES OF
STOCKS
 Shares of stocks may be sold
directly to the shareholders or
indirectly through a brokerage
firm or stock barrier.
SHAREHOLDER’S EQUITY
Represents the residual interest of the
shareholders in the net assets of the
corporation.
Assets = Liabilities + Shareholder’s
Equity
Shareholder’s Equity is divided into
two parts:
1. Contributed/Paid in Capital
- represents total contributions
made by the shareholders
- The “capital” (needed
investment) of the
corporation is divided into
units called shares of stocks.
- The shareholder’s equity
over the corporation is called
Share Capital or Capital
Stock.
- The investor buying shares
of stocks are called
stockholders.
- For trust fund doctrine.
2. Retained Earnings/Accumulated
Earnings
- Represents accumulated
profit earned or losses
incurred in the operation of
the business.
- Against which dividends are
drawn.
- Distribution of profit
(dividends) to all
shareholders can only be
made upon declaration by
the Board of directors.
ACCOUNTING FOR OWNERSHIP
INTEREST
1. Share Capital
- Credit: Contribution at Par
2. Share Premium
- Credit: Excess Contributions
3. Retained Earnings
- Debit: dividends
- Credit: Periodic Profit
ACCOUNTING FOR SHARES OF
STOCKS
1. Authorization
- Represents the maximum
number of shares or
amounts the corporation is
allowed to issue stated in the
AOI.
- This is called Authorized
Share Capital/Capital Stock
2. Sale
- Shareholders buys and pays
immediately in full the shares
are considered sold and a
stock certificate is issued.
- Called Share Capital.
3. Subscription
 CHAPTER 6:
CORPORATE FORMATION AND SHAREHOLDER’S EQUITY
- Subscriber enters into a
contact to buy number of
shares.
- Down payment is usually
required with the balance
payable on the fixed date or
upon call by the BOD.
- Called Subscribed Share
Capital.
4. Collection of subscription
- Subscription may be paid by
the shareholder in cash,
property, or in the form of
service.
5. Issuance of Certificate
- Once the subscription is
collected in full, a certificate
is issued.
6. Reacquisition of shares
- Issuing corporation may
reacquire (purchase or
redeem) the shares of stock
which were originally issued
with the intention of either
reselling or retiring these
shares in the near future,
- Called Treasury Shares.
(See Sec. 9)
 Treasury Shares are
issued shares but no
longer outstanding as
they have been
repurchased by the
corporation.
 Outstanding Shares are
the total issued shares
(except for Treasury
Shares). These are the
stocks still in the hands
of shareholders.
MOVEMENTS OF STOCK
TRANSACTION
CORPORATION SHAREHOLDERS
Authorized Sold and Issued
Authorized Subscribed, Full
Collection, and
Issued
Reacquired Issued
either to be
resold or retired
ACCOUNT TITLES USED FOR STOCK
TRANSACTIONS
1. Share Capital - for a par value
stock, this account is credited at
the par value when shares sold or
subscribed have been fully
collected.
- Credited for the total amount
collected
2. Subscription Receivable – this
is an account that is debited at
the subscription price based on
the number of shares subscribed
and credited to decrease when it
is collected.
- If there is no call date, it is
treated as a contra
shareholder’s equity account
deducted from Subscribed
Share Capital to arrive at
Paid In or Contributed
Capital.
3. Subscribed Share Capital – this
account is credited for the total
par value of the shares
subscribed and debited when
subscription has been fully
collected.
 CHAPTER 6:
CORPORATE FORMATION AND SHAREHOLDER’S EQUITY
- If no par, it is credited for the
total subscription price,
similar to Share Capital.
4. Paid in Capital In Excess of
Par/Share Premium - credited
for contribution in excess of the
par value.
5. Treasury Shares – this account
is debited for the shares
purchased by the corporation
from the shares it has originally
issued out.
The first section of the shareholder’s
equity will appear as follows for par
value shares:
Paid In Capital
Share Capital
Subscribed Share Capital
Additional Paid in Capital
Share Premium
Total Contributed Capital
METHOD OF ACCOUNTING FOR
STOCKS
Only 2 Difference of Memorandum Entry
and Journal Entry:
 Recording of Authorization of
Issuance of stocks and Issuance
of stock certificate
1. The Memorandum Entry:
- The authorized shares is
recorded using a
memorandum entry only and
when shares is issued.
- Share Capital is increased
by credit entry.
2. Journal Entry:
- Authorized capital is
recorded by debiting
Unissued Share Capital and
by crediting Authorized
Share Capital.
- Every time shares are
issued, the Unissued Share
Capital is decreased by a
credit entry.
To summarize:
 Asset contribution may be in the
form of cash, property or service.
 Following the COST PRINCIPLE,
properties must be recorded at its
fair market value or the FMV of
the shares to be issued
whichever is more clearly
determinable.
 Services must be recorded at its
billed price.
 For par value stock, Share
Capital and Subscribed Share
Capital must be recorded at the
PAR VALUE.
- Share Capital is CREDITED
when stock certificate is
issued otherwise the title
should be Subscribed Share
Capital.
- Stock Certificate is issued
ONLY when the shares are
fully paid.
 Excess contribution is recorded
as an ADDITIONAL PAID IN
CAPITAL account, Paid in
Excess of Par or Share Premium.
 Organization Expense, being a
NOMINAL account, is charged
against ACCUMULATED
PROFIT or RETAINED
EARNINGS.
 Subscription Receivable is a
CURRENT ASSET when it is
callable within “n” days.
- If callable LONGER THAN
ONE YEAR, it is presented
 CHAPTER 6:
CORPORATE FORMATION AND SHAREHOLDER’S EQUITY
as a NON CURRENT
ASSET account.
- When a subscription is NOT
ON CALL, it would be as
CONTRA
SHAREHOLDER’S EQUITY
account decreasing the
subscribed share capital
stock.
 All contributions are considered
Legal Capital for no par value
stock.

SHAREHOLDER’S JOURNAL
(See page 168)
 It registers where on notes downs
the number of shares issue and
the number of shares transferred,
 No peso amounts are included
 No debit and credit
 Issued shares on right side
 Cancelled Shares on the left

SHAREHOLDER’S LEDGER
(See page 168)
 A subsidiary ledger containing the
accounts of each shareholder.
 Postings will come from the
shareholder’s journal.

SUBSCRIBER’S LEDGER
(See page 168)
 Containing the accounts of each
subscriber.
 Left side contains the stock
subscribed or the value of
subscription collectible.
 Right side contains the payments
made by the subscriber.
 Should tally in the accountant’s
general ledger.