MODULE 6 - Special Journals

1. Introduction/Overview
The use of books depends on the need of the business with due consideration to the nature and volume of
its transactions. If the business has voluminous transactions during the period and these transactions are
repetitive in nature, it will be tedious and time consuming to individually record them in the general
journal. Therefore, a business may use other books in addition to the general journal to efficiently record
its daily transactions. These other books are called special journals.
This chapter covers the discussion of different types of special journals, their uses and the illustration on
the proper recording of transactions to these journals.

3. Books of Original Entry

1. Cash Receipts Journal

2. Cash Payments Journal – commonly called Cash Disbursements Journal
3. Purchases Journal
4. Sales Journal
5. General Journal

These five journals are all books of original entry. The first four books listed above are commonly known
as the special journals.
The cash receipts journal is a record of transactions involving cash received from all sources by the
business; the cash payments journal is for transactions involving cash payments made by the business;
the purchases journal is where transactions involving merchandise bought either on cash basis or on
account are recorded, while the sales journal is used for recording transactions involving merchandise
sold either for cash or on account.; and the general journal is for transactions that do not involve receipt
or payment of cash nor sale or purchase of merchandise, in other words, those transactions which cannot
be recorded in the special journals.

A diagram for the recording of business transactions in the journals is shown below:

The business may use all or only two or three of the special journals. The use of special journals is
determined by the frequency of the occurrence of similar business transactions during a period. For
example, if the business buys or sells merchandise purely on cash basis, only the cash receipts journal and
cash payments journal may only be used. However, since there will always be miscellaneous transactions
which cannot be recorded in the special journals, the general journal must always be maintained by the
business as one of the books of original entry, regardless of the kinds of special journals being used.
Forms of Special Journals
The forms of special journals are designed according to the nature and needs of the business. Therefore,
the forms may vary. The forms illustrated here are the ones suggested for recording transactions in the
special journals.
4. Cash Receipts Journal

• Cash - the amount of cash received is recorded in this column.

• Sales Discount - cash discounts granted to account customers are recorded in this column.
• Accounts Receivable – the gross amount of receivable collected is recorded in this column.
• Cash Sales - sales of merchandise on cash basis are recorded in this column. Down payments
received on the date of sale should not be recorded in this column. Since cash sale involves both
the sale of goods and the receipt of cash, for every entry in the Cash Sales (Cr.) column in the
cash receipts journal, a corresponding entry in the Cash Sales (Dr.) column in the sales journal
must be made.
• Sundry - all other transactions which involve the receipt of cash other than cash sales of
merchandise and collections from account customers are recorded in this column.

5. Cash Disbursements Journal

• Cash - the amount of cash paid is recorded in this column.

• Purchases Discount - cash discounts availed on merchandise purchased are recorded in this
column. Cash discounts on other assets purchased are recorded in the general journal because
these are recorded by crediting the related asset account rather than the Purchases Discount
account.
• Accounts Payable - the gross amount of payable being paid is recorded in this column.
• Cash Purchases – purchases of merchandise on cash basis are recorded in this column. Down
payments made to the supplier on the date of sale should not be recorded in this column. Since
cash purchase involves both the purchase of goods and the cash payment, for every entry in the
Cash Purchases (Dr.) column in the cash disbursements journal, a corresponding entry in the Cash
Purchases (Cr.) column in the purchases journal must be made.
• Sundry - all other transactions which involve the payment of cash other than cash purchases of
merchandise and payments of accounts to suppliers are recorded in this column.
6. Sales Journal

• Accounts Receivable - all sales of merchandise on account are recorded in this column.
• Cash Sales - sales of merchandise on cash basis are recorded in this column. Since cash sale
involves both the sale of goods and the receipt of cash, for every entry in the Cash Sales (Dr)
column in the sales journal, a corresponding entry in the Cash Sales (Cr.) column in the cash
receipts journal must be made.
• Sales - the amount of merchandise sold, whether for cash or on credit, is recorded in this column.
The sale of merchandise that involves down payments is recorded in the sales journal as if the sale were
totally on account and the down payment is recorded as collection of account on the same date. On the
other hand, the sale of merchandise that involves the issuance of customer’s promissory note is recorded
in the sales journal as if it were sale on account and then recorded in the general journal on the same date
as if the note were issued to settle the account.

7. Purchase Journal

• Purchases - the amounts of merchandise purchased are recorded in this column, whether for cash
or on credit.
• Accounts Payable – all purchases of merchandise on account are recorded in this column.
• Cash Purchases – purchases of merchandise on cash basis are recorded in this column. Since cash
purchase involves both the purchase of goods and the cash payment, for every entry in the Cash
Purchases (Cr.) column in the purchases journal, a corresponding entry in the Cash Purchases
(Dr.) column in the cash disbursements journal must be made.
The purchase of merchandise that involves down payments is recorded in the purchases journal as if the
purchase were totally on account and the down payment is recorded as payment of account on the same
date. On the other hand, the purchase of merchandise that involves the issuance of promissory note to the
seller is recorded in the purchases journal as if it were purchase on account and then recorded in the
general journal on the same date as if the note were issued to settle the account.
Note: For each transaction in every special journal, the total debits must equal to the total credits. The
same is true for the summary of the transactions during a period.
8. Two-Column General Journal
The form of the two-column general journal is as follows:

All transactions that can not be recorded in the special journals are recorded in the general journal. Some
of these transactions are:
1. Investment of the proprietor of non-cash assets.
2. Sales returns and allowances granted on account sales.
3. Purchase returns and allowances granted on account purchases.
4. Purchase of assets on account.
5. Purchase of assets and issuance of promissory note.
6. Returns and allowances on assets purchased
7. Cash discount on assets purchased.
8. Settlement of open account by issuance of promissory note.
9. Adjusting entries

9. Illustrations
Transactions:
Jan 2 – Received P500,000 as initial investment from the proprietor, Mr. Angelo De Guzman. (OR.
No.001)
3 – Purchased merchandise from Apple Co. for cash, P20,000. (RR No. 1001, (CV # 001, Check
# 5001, Inv.# 143)
4 – Purchased goods from Banana Ent., P50,000. Terms: 10% volume discount, 2/10, n/30. (RR
No. 1002)
4 – Paid freight to Express Inc. for goods purchased from Banana Inc., P1,200. (CV # 002, Check
# 5002, Inv.#710)
5 – Returned merchandise to Apple Co. and received cash of P1,000. (DCM No. 01, OR No. 002)
6 – Returned goods to Banana Ent., P5,000. (DCM No. 02)
6 – Sold goods to Blue Corp., P20,000. Terms: 20% down, bal. 3/10, n/15. (SI No. 0001, OR. No.
003)
7 - Sold goods to Red Co. for cash, P15,000. (SI No. 0002, OR No. 004)
8 – Purchased goods from Guava Supply, P30,000. Terms: n/15 (RR No. 1003, Inv. No. 601)
14 – Paid the account with Banana Ent. in full. (CV No. 003, Check No. 5003)
15 – Paid rental to BFF Realty, P15,000. (CV No. 004, Check No. 5004)
16 – Collected the account of Blue Corp. in full. (OR No. 005)
23 – Issued a 30-day, 6% promissory note in full settlement of account with Guava Supply.
Cash Receipts Journal

Cash Disbursements Journal

Sales Journal

Purchase Journal

General Journal
Module 7 - PARTNERSHIP
1. Introduction/Overview
This module demonstrates an understanding of accounting for the equity of partnership formation. At the
end of this module, the learners will be able to account for the accounting for a partnership that must
comply with the relevant provisions of the Civil Code of the Philippines.
3. PARTNERSHIP
Definitions of Partnership
Partnership has been defined variously, as follows:
1. “By the contract of partnership, two or more persons bind themselves to contribute money,
property, or industry to a common fund with the intention of dividing the profits among themselves. Two
or more persons may also form a partnership for the exercise of a profession.
2. “An association of two or more persons to carry on as co-owners of a business for profit.
3. “A joint undertaking to share in the profit and loss.
4. “A joint undertaking to share in the profit and loss.
5. “A legal relation based upon the express or implied agreement of two or more competent persons
whereby they unite their property, labor or skill in carrying on some lawful business as principles for their
joint profit.
The law provides that the minimum number of owners composing a partnership must be at least two
persons. However, it does not specify the maximum number of persons composing a partnership because
of the words “…two or more persons.”
Characteristics of Partnership

1. Ease of formation 5. Co-ownership of Profits

2. Separate legal personality 6. Limited Life
3. Mutual agency 7. Transfer of Ownership
4. Co-ownership of property 8. Unlimited Liability

Advantages and Disadvantages of a

Partnership
A Partnership, as a form of the business
organization, offers several advantages and
disadvantages as delineated on the side:

3. PARTNERSHIP
3.1. PARTNERSHIP ACCOUNTING
The following are the major considerations in
the accounting for the equity of a partnership:
a. Formation – accounting for initial
investments to the partnership
b. Operations – division of profits or losses
c. Dissolution – admission of a new
partner and withdrawal, retirement or death of
a partner
d. Liquidation – winding up of affairs
 • Owner’s equity accounts. Partnership has two or more owners, separate capital and drawing
accounts are established for each partner.
• A partner’s capital account is credited for his initial and additional net investments (assets
contributed less liabilities assumed by the partnership), and a credit balance of the drawing
account at the end of the period. It is debited for his permanent withdrawals and debit balance of
the drawing account at the end of the period.
• To meet personal living expenses, partners customarily withdraw money on a periodic basis
throughout the year. A partner’s drawing account is debited to reflect assets temporarily
withdrawn by him from the partnership. At the end of each accounting period, the balances in the
drawing accounts are closed to the related capital accounts

Permanent withdrawals are made with the intention of permanently decreasing the partner’s capital while
temporary withdrawals are regular advances made by the partners in anticipation of their share in profit.
The use of drawing accounts for temporary withdrawals provides a record of each partner’s drawings
during an accounting period. Hence, drawings in excess of the allowed amounts as stated in the
partnership agreement may be controlled.
If the partners wish to maintain their capital accounts for investments and permanent withdrawals, then
profit or loss should be entered in the drawing account. On the other hand, if the purpose of the partners is
to make profit or loss part of their capital, then the capital account should be used.

Loans Receivable from or Payable to Partners

• If a partner withdraws a substantial amount of money with the intention of repaying it, the debit
should be to loans receivable-partner account instead of to partner’s drawing account. This
account should be classified separately from other receivables of the partnership.
• A partner may lend amounts to the partnership in excess of his intended permanent investment,
these advances should be credited to loans-payable account and not to partner’s capital account
classified among the liabilities but separate from liabilities from outsiders.
In general, the accounting principles and procedures used in recording partnership transactions with
outside parties are the same as those of sole proprietorships and corporations. The difference, however,
lies in the owners’ equity accounts. In sole proprietorship, there is one capital account and one withdrawal
account because there is only one owner of the business. On the other hand, the capital accounts and
drawing accounts of a partnership business are more than one depending on the number of partners in the
association. The corporation’s equity section, however, does not contain the capital and drawings
accounts of individual stockholders. Instead, it contains the capital stock and retained earnings accounts.
Accordingly, the partnership assets, liabilities, revenues and expenses are all recorded in accordance with
the GAAP in the same manner as in the single proprietorships or corporations, except for the accounting
elements under the equity section of the statement of financial position.
Module 8 - PARTNERSHIP FORMATION
1. Introduction/Overview
This module demonstrates an understanding of accounting for the equity of partnership formation. At the
end of this module, the learners will be able to account for the accounting for a partnership that must
comply with the relevant provisions of the Civil Code of the Philippines.
3. INTRODUCTION TO PARTNERSHIP
Definitions of Partnership
Partnership has been defined variously, as follows:
1. “By the contract of partnership, two or more persons bind themselves to contribute money,
property, or industry to a common fund with the intention of dividing the profits among themselves. Two
or more persons may also form a partnership for the exercise of a profession.(Art. 1767, Civil Code of
the Philippines)
2. “An association of two or more persons to carry on as co-owners of a business for profit.
3. “A joint undertaking to share in the profit and loss.
4. “A joint undertaking to share in the profit and loss.
5. “A legal relation based upon the express or implied agreement of two or more competent persons
whereby they unite their property, labor or skill in carrying on some lawful business as principles for their
joint profit.
The law provides that the minimum number of owners composing a partnership must be at least two
persons. However, it does not specify the maximum number of persons composing a partnership because
of the words “…two or more persons.”
Types of Partnerships
1. General Partnerships - consists of all general partners.
2. Limited Partnerships - consists of at least one limited partner and at least one general partner.
Characteristics of Partnership
1. Ease of formation 5. Co-ownership of Profits
2. Separate legal personality 6. Limited Life
3. Mutual agency 7. Transfer of Ownership
4. Co-ownership of property 8. Unlimited Liability
Advantages and Disadvantages of a Partnership
A Partnership, as a form of the business
organization, offers several advantages and
disadvantages as delineated on the side:

Kinds of Partners
As to liability
1. General Partner - personally liable to the
partnership's obligations after the partnership's
assets are exhausted.
2. Limited Partner - obligation to the creditors is
limited to his capital contribution to the partnership.
3. INTRODUCTION TO PARTNERSHIP
3.1. PARTNERSHIP ACCOUNTING
The following are the major considerations in the
accounting for the equity of a partnership:
a. Formation – accounting for initial
investments to the partnership
b. Operations – division of profits or losses
c. Dissolution – admission of a new partner and withdrawal, retirement or death of a partner
d. Liquidation – winding up of affairs

• Owner’s equity accounts. Partnership has two or more owners, separate capital and drawing
accounts are established for each partner.
• A partner’s capital account is credited for his initial and additional net investments (assets
contributed less liabilities assumed by the partnership), and a credit balance of the drawing
account at the end of the period. It is debited for his permanent withdrawals and debit balance of
the drawing account at the end of the period.
• To meet personal living expenses, partners customarily withdraw money on a periodic basis
throughout the year. A partner’s drawing account is debited to reflect assets temporarily
withdrawn by him from the partnership. At the end of each accounting period, the balances in the
drawing accounts are closed to the related capital accounts

Permanent withdrawals are made with the intention of permanently decreasing the partner’s capital while
temporary withdrawals are regular advances made by the partners in anticipation of their share in profit.
The use of drawing accounts for temporary withdrawals provides a record of each partner’s drawings
during an accounting period. Hence, drawings in excess of the allowed amounts as stated in the
partnership agreement may be controlled.
If the partners wish to maintain their capital accounts for investments and permanent withdrawals, then
profit or loss should be entered in the drawing account. On the other hand, if the purpose of the partners is
to make profit or loss part of their capital, then the capital account should be used.

Loans Receivable from or Payable to Partners

• If a partner withdraws a substantial amount of money with the intention of repaying it, the debit
should be to loans receivable-partner account instead of to partner’s drawing account. This
account should be classified separately from other receivables of the partnership.
• A partner may lend amounts to the partnership in excess of his intended permanent investment,
these advances should be credited to loans-payable account and not to partner’s capital account
classified among the liabilities but separate from liabilities from outsiders.
In general, the accounting principles and procedures used in recording partnership transactions with
outside parties are the same as those of sole proprietorships and corporations. The difference, however,
lies in the owners’ equity accounts. In sole proprietorship, there is one capital account and one withdrawal
account because there is only one owner of the business. On the other hand, the capital accounts and
drawing accounts of a partnership business are more than one depending on the number of partners in the
association. The corporation’s equity section, however, does not contain the capital and drawings
accounts of individual stockholders. Instead, it contains the capital stock and retained earnings accounts.
Accordingly, the partnership assets, liabilities, revenues and expenses are all recorded in accordance with
the GAAP in the same manner as in the single proprietorships or corporations, except for the accounting
elements under the equity section of the statement of financial position.
4. PARTNERSHIP FORMATION
It refers to the perfection of the partnership contract by the partners. When a partnership is formed,
partners commonly observe the following to effect fair and honest business:
1. Execution of partners’ agreement.
2. Valuation of partners’ investments.
3. Adjustments of accounts.
If there is an existing sole proprietor’s business that would be converted as a partnership, all accounts that
are being revalued according to the partnership agreement would increase or decrease the contributing
partner's capital. The adjustments of the accounts are very important because they reflect the fair and
equitable value of the prospective partner’s contributions to the partnership.
The following rules shall then be observed when capital contribution issues arise:

1. Amount of
contribution. The amount
of contribution shall be
based on the partners’
agreement. In the absence
of any agreement, it shall
be contributed equally.

2. Valuation of partners' contribution. If cash

contribution is made, the face value of cash is
the amount to be recognized. If a noncash
contribution is to be made, it shall be recorded
at agreed value; otherwise, it will be recorded at
the fair value of the property to effect fair and
equitable valuation.

Notes:
1. If there is no agreed value, the investment
of capital in a partnership should be measured
at the fair value of all tangible and intangible
assets contributed at the time of their transfer to
the partnership. An individual partner’s
liabilities that have been assumed by the
partnership should also be recorded at fair
market value.
2. The fair value or fair market value represents the estimated amount in which the seller and buyer
would be willing to exchange value in an open market. In other words, fair market value suggests the
approximate cash equivalent of an asset.
Valuation of contributions of partners
• Accordingly, all assets contributed to (and related liabilities assumed by) partnership are initially
measured at fair value.
• When measuring the contributions of partners, the following additional guidance from the PFRSs
shall be observed:
• Cash and Cash equivalents – Face amount
• Inventory – lower of cost and net realizable value
Adjustment of accounts prior to the formation
• In cases when the prospective partners have existing businesses, their respective books will have
to be adjusted to reflect the fair market values of their assets or to correct misstatements in the
accounts.
• The adjustments of the assets and liabilities prior to formation will be similar to the adjustments
we do but, when the adjustment involves a debit or credit to a nominal account, the capital
account would instead be debited or credited. This is so because the business has ceased to be a
going concern.

Opening entries of a partnership upon formation

• A partnership may be formed in any of the following ways:
1. Individuals with no existing business form a partnership.
2. Conversion of a sole proprietorship to a partnership.
a. A sole proprietor and an individual without existing business form a partnership
b. Two or more sole proprietors form a partnership.
3. Admission or retirement of a partner

Individuals with no existing business form a partnership

• The opening entry to recognize the contributions of each partner into the partnership is simply to
debit the assets contributed and to credit the liabilities assumed and the capital account of each
partner.
Illustration:

On July 1, 2020, Arnold Quinto and Lovilet Ruiz agreed to form a partnership. The partnership agreement
specified that Quinto is to invest cash of P700,000 and Ruiz is to contribute land with a fair market value
of P1,300,000 with P300,000 mortgage to be assumed by the partnership. The entries are as follows:
Cash 700,000
Land 1,300,000
Mortgage Payable 300,000
Arnold Quinto, Capital 700,000
Lovilet Ruiz, Capital 1,000,000
After formation, the statement of financial position of the partnership is:

A sole proprietor and another individual form a partnership

• A sole proprietor may consider forming a partnership with an individual who has no existing
business. Under this type of formation, the assets and the liabilities of the proprietorship will be
transferred to the newly formed partnership at values agreed upon by all the partners or at their
current fair prices.
• The following procedures may be used in recording the formation of the partnership:
• Books of the sole proprietor:
1. Adjust the assets and liabilities in accordance with the agreement. Adjustments are to be made to his
capital account.
2. Close the books.
• Books of the partnership
1. Record investment of the sole proprietor
2. Record investment of the individual without an existing business.
Two or more sole proprietor form a partnership
• The following procedures may be used in recording the formation of the partnership:
• Books of the sole proprietor:
1. Adjust the assets and liabilities in accordance with agreement. Adjustments are to be made to his
capital account.

2. Close the books.

• Books of the partnership
1. Record investment of the sole proprietor

5. BONUS ON INITIAL INVESTMENT

An accounting problem exists when a partner’s capital account is credited for an amount greater than the
fair value of his contributions. If a partner’s capital balance is credited for an amount greater than or less
than the air value of his net contribution, there is a bonus.
Under bonus method, any increase (or decrease) in the capital credit of a partner is deducted from (or
added to) the capital credits of the other partners. The total partnership capital remains equal to the fair
value of the partner’s net contributions to the partnership.
Illustration:
A and B agreed to form a partnership. A contributed P40,000 cash while B contributed equipment with air
value of P100,000. However, due to the expertise that A will be bringing to the partnership, the partners
agreed that they should initially have an equal interest in the partnership capital
Requirement:
Provide the journal entry to record the initial investments of the partners.
Solution:

Variations to bonus method

A partnership agreement may stipulate a certain ratio to be maintained by the partners representing their
specific interest in the equity of the partnership. This stipulation may give rise to adjustments to the initial
contributions of the partners. Any increase or decrease to the capital credit of a partner is not deducted
from his co-partners’ capital accounts. Instead, the capital adjustment is accounted for as either:
a. cash settlement among the partners; or
b. Additional investment or withdrawal of investment of a partner
Illustration 1: Cash settlement between partners
A, B and C formed a partnership. Their contributions are as follows:

Additional information:
• The equipment has an unpaid mortgage of P20,000 which the partnership assumes to repay.
• The partners agreed to equalize their interests. Cash settlements among partners are to be made
outside the partnership.
Requirements:
a. Which partner(s) shall receive a cash payment from the other partner(s)
b. Provide the entry to record the contributions of the partners.
Solution:
Requirement a

Answer: C shall receive P30,000 from A

Requirement b

Illustration 2: Additional investment (withdrawal o investment)

A and B agreed to form a partnership. The partnership agreement stipulates the following:
• initial investment of P140,000
• A 60:40 interest in the equity of the partnership
A contributed P100,000 cash while B contributed P40,000 cash.
Requirement: Which partner shall provide additional investment (or withdraw part of his investment) in
order to bring the partners’ capital credits equal to their respective interests in the equity of the
partnership?
Solution:

Answer: A shall withdraw P16,000 from his initial contribution while B shall make an additional
investment of P16,000.
Module 9 - PARTNERSHIP OPERATIONS
1. Introduction/Overview
This module demonstrates an understanding of accounting for the equity of partnership operations. At the
end of this module, the learners will be able to account for the accounting for a partnership that must
comply with the relevant provisions of the Civil Code of the Philippines. Learners are also expected to
describe accounting procedures for partnership profits and losses.
3. PARTNERSHIP OPERATIONS
The accounting for partnership operation is concerned with the following activities:
1. Accounting treatment of profit and loss
2. Proper distribution of profit and loss
3. Preparation of financial statements such as:
a. Income statement (Statement of Recognized Income and Expenses)
b. Statement of Financial Position (formerly Balance Sheet)
c. Partners’ capital statement (Statement of Changes in Partners’ Equity)

3. PARTNERSHIP OPERATIONS
3.1. Accounting Treatment of Partnership’s Profit and Loss
The determination of proper income or loss is made through the preparation of income statement with the
following basic formula:

In the journal entry, there is net income if the income summary account has a credit balance. There is net
loss if the income summary account has a debit balance. The profit or loss is subsequently distributed to
the partners by closing the income summary account to the respective partners’ capital accounts.
3. PARTNERSHIP OPERATIONS
3.2. Rules for developing distribution of profits or losses

• The profits or losses shall be distributed in conformity with the agreement. If only the share of
each partner in the profits has been agreed upon, the share of each in the losses shall be in the
same proportion.
• In the absence of stipulation, the share of each partner in profits or losses shall be in proportion to
what he may have contributed.
• A stipulation which excludes one or more partners from any share in the profits or losses is void.
• The designation of losses and profits cannot be entrusted to one of the partners (Art 1798). A
stipulation which excludes one or more partners from any share in the profits or losses is void
(Art. 1799)

3. PARTNERSHIP OPERATIONS
3.3. Summary of legal provision of profit and loss distribution
Profits
a. The profits will be divided according to the partner’s agreement.
b. If there is no agreement:
 - As to capitalist partners, the profits shall be divided according to their capital contributions
(according to the ratio of original capital investments or in its absence, the ratio of capital balances at the
beginning of the year
- As to industrial partners (if any), such share as may be just and equitable under the
circumstances, provided, that the industrial partner shall receive such share before the capitalist partners
shall divide the profits.
Losses
a. The losses will be divided according to the partner’s agreement
b. If there is no agreement as to the distribution of losses but there is an agreement as to profits, the
losses shall be distributed according to the profit-sharing ratio.
c. In the absence of agreement:
- As to capitalist partners, the losses shall be divided according to their capital contributions
(according to the ratio of original capital investments or in its absence, the ratio of capital balances at the
beginning of the year).
- As to purely industrial partners (if there’s any), shall not be liable for any losses.
• The industrial partner is not liable for losses because he cannot withdraw the work or labor
already done by him.

3. PARTNERSHIP OPERATIONS
3.4. Distribution of profits or loss based on partner’s agreement

• In general, profits or losses shall be divided in accordance with the agreement of the partners. The
ratio in which profit or losses from partnership operations are distributed is recognized as the profit and
loss ratio.
• The partners may agree on any of the following scheme in distributing profits or losses.

1. Equally or in other agreed ratio

2. Based on partner’s capital contributions
a. ratio of original capital investments
b. ratio of capital balances at the beginning of the year.
c. ratio of capital balances at the end of the year
d. ratio of average capital balances
3. By allowing interest on partner’s capital and the balance in agreed ratio
4. By allowing salaries to partners and the balance in agreed ratio
5. By allowing bonus to the managing partner based on profit and the balance in an agreed ratio.
6. By allowing salaries, interest on partner’s capital, bonus to the managing partner and the balance in
agreed ratio.

Entry on distribution of profit and loss

• Profit
Income Summary xx
Partner’s Drawing xx
• Loss
Partner’s Drawing xx
Income Summary xx
Based on the partner’s capital contribution
• Division of partnership profits in proportion to the capital invested by each partner is most likely
to be found in partnerships in which substantial investments is the principal ingredient for
success.
• Division of profits or losses on the basis of the three capital concepts- the original capital
investments, capital balances at the beginning of the year, or capital balances at the end of the
year- may prove inequitable if there is material changes in the capital accounts during the year.

By allowing interest on capital and the balance in an agreed ratio

• Partnerships may choose to allocate a portion of the total profits in the capital ratio and balance
equally or in other agreed ratio after due consideration of the partner’s other contributions.
• To allow interest on partner’s capital account balances is almost similar to dividing part of profits
in the ratio of partner’s capital balances. If the partners agree to allow interest on capital as a first
step in the division of profit, they should specify in the interest rate to be used. It should state
whether interest is to be computed on capital balances on specific dates or on average capital
balances during the year.
• Interest on the partner’s capital is considered as a mere technique to share partnership profit and
losses and not as expenses of the partnership.
• On the other hand, the interest on loans from partners is recognized as an expense and a factor in
the measurement of profit or loss of the partnership.
• If the partnership agreement provided for interest on capital accounts, this provision must be
honored regardless of whether operations yielded profits or not.

By allowing salaries to partners and the balance in an agreed ratio

• The sharing agreement may provide for variations in compensating the personal services
contributed by partners. Even among partners who devote equal service time, one partner’s
superior experience and knowledge may command a greater share of the profit. To acknowledge
the harder working or more valuable partner, the profit-sharing plan may provide for salary
allowances.
• In the absence of an agreement to govern this situation, salary allowances will be provided even
when operations yielded losses.
• Partners are the partnership’s owners, they are not employees of the business. When the partners
calculate the profit of the partnership, salaries to the partners are not deducted as expenses in the
statement of recognized income and expense.

By allowing bonus to the managing partner based on profit and the balance in an agreed ratio
• A partnership contract may provide for a special compensation in the form of bonus to the
managing partner when the results of operations of the partnership are favorable.
• This allowance is given in order to encourage the partner to maximize the profit potentials of the
partnership. A bonus is not being considered in the computation of profit, rather it is a mere
technique to distribute profits.
3. PARTNERSHIP OPERATIONS
3.5. Illustrations
Illustration 1: Salaries
A and B’s partnership agreement provides for annual salary allowances of P50,000 for A and P30,000 for
B. The salary allowances are to be withdrawn throughout the period and are to be debited to the partner’s
respective drawing accounts.
Case 1 : The partnership share profits equally and losses on a 60:40 ratio. The partnership earned profit of
P100,000 before salary allowances.
Requirements:
a. Compute for the respective shares of the partners in the profit.
b. Provide the journal entries.

Case 2: The partners share profits equally and losses on a 60:40 ratio. The partnership earned
profit o P70,000 before salary allowances.

Requirement: Compute for the respective shares of the partners in the profit.
3. PARTNERSHIP OPERATIONS
3.6. ADDITIONAL NOTES: PARTNERSHIP OPERATIONS

Profit and Loss Agreement

Module 10 - CORPORATION

1. Introduction/Overview
This module covers the concepts involved in a corporation. At the end of this module, the learners are
expected to be able to distinguish corporation, in different aspects, from the previous two types of
business organizations.
3. Corporation
DEFINITION
A 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. (Section 1,
Corporation Code of the Philippines)

CHARACTERISTICS OF A CORPORATION
1. Separate legal entity – artificial being. A corporation is an artificial being with personality that is
separate and distinct from that of its individual owners. Thus, it may, under its corporate name, take, hold
or convey property to the extent allowed by law, enter into contracts, and sue or be sued.
2. Created by operation of law. A corporation is generally created by operation of law. The mere
agreement of the parties cannot give rise to a corporation.
3. Right of succession. A corporation has the right of succession. Irrespective of the death,
withdrawal, insolvency or incapacity of the individual members or shareholders, and regardless of the
transfer of their interest or share capital, a corporation can continue its existence up to the period of time
stated in the articles of incorporation but not to exceed fifty years.
4. Powers, attributes, properties authorized by law. A corporation has only the powers, attributes,
and properties expressly authorized by law or incident to its existence.
5. Ownership divided into shares. Proprietorship in a corporation is divided into units known as
share capital. The buyers of this share capital are called shareholders or stockholders and are considered
owners of the business.
6. Board of directors. Management of the business is vested in a board of directors elected by the
shareholders. The board of directors is the governing body or decision-making body of the corporation.
The Corporation Law provides that the number of directors be not less than five but not more than fifteen.

ADVANTAGES OF A CORPORATION
1. The corporation enjoys continuous existence because of its power of succession.
2. The corporation has the ability to obtain a strong credit line because of continuity of existence.
3. Large scale business undertakings are made possible because many individuals can invest their
funds in the enterprise.
4. The liability of its investors or shareholders is limited to the extent of their investment in the
corporation.
5. The transfer of shares can be effected without the need for prior consent of other shareholders.
6. Its smooth operation is guaranteed because of centralized management.

DISADVANTAGES OF A CORPORATION
1. It is not easy to organize because of complicated legal requirements and high costs in its
organization.
2. The limited liability of its shareholders may weaken its credit capacity.
3. It is subject to rigid government control.
4. It is subject to more taxes.
5. Its centralized management restricts a more active participation by shareholders in the conduct of
corporate affairs.
3.1. Classes of Corporation
Corporations are generally classified according to purpose, membership holdings, compliance of law, law
of creation, or extent of membership.

1. As to membership holdings
a. Stock corporation – a private corporation in which the capital is divided into shares of stocks and is
authorized to distribute corporate earnings to holders on the basis of shares held.
b. Non-stock corporation – a private corporation in which capital comes from fees paid by
individuals composing it. The owners of a non-stock corporation are called members.

2. As to purpose
a. Public corporation – a corporation that is organized to govern a portion of the state ( e.g.
municipalities, provinces).
b. Private corporation – a corporation that is organized for a private benefit, aim or end.
c. Quasi-public corporation – a private corporation which is given a franchise to perform functions of
a public character. Classified under this type are the so-called public utility corporations such as
MERALCO and PLDT.

3. As to compliance of law
a. De jure corporation – a corporation which exists both in law and fact. It exists in law because it has
complied with all the legal requirements; it exists in fact because it actually operates as a corporation.
b. De facto corporation – a corporation which exists only in fact but not in law because of non-
compliance with certain legal requirements.

4. As to law of creation
a. Domestic corporation – a corporation that is organized under Philippine laws.
b. Foreign corporation – a corporation that is organized under the laws of other countries.

5. As to extent of membership
a. Open corporation – a corporation whose ownership is widely held by many investors, usually a
private stock corporation.
b. Closely-held corporation or Family Corporation – a private corporation in which 50% or more of
its stock is owned by five persons or less.

Other types of corporation include parent or holding corporations, subsidiary corporations, ecclesiastical
corporations and lay corporations which are themselves classified into other groups.

6. As to number of stockholders
a. Regular corporation – consists of 2 or more stockholders
b. One person corporation (OPC) – consists of single stockholder
3.2. Components of Corporation
1. Incorporators – they are the persons who originally formed the corporation and whose names
appear in the Articles of Incorporation. They must be natural persons as distinguished from artificial
persons.
2. Corporators - they are the persons who compose the corporation whether as shareholders or
members.
3. Stockholders or shareholders - they are the corporators of a stock corporation.
4. Members – they are the corporators of a non-stock corporation.
5. Promoters – they are the persons who undertake to (a) form a company based on a given project,
(b) set it going, and (c) take the necessary steps to accomplish the purpose for which the corporation is
organized.
6. Subscribers – they are the persons who have agreed to take original, unissued shares but will pay
at a later date. They may be incorporators or not and they may eventually become shareholders the
moment the full payment of their subscriptions is made.
7. Underwriters – they are those who undertake to dispose of the shares to the general public.
3.3. Organizing a Corporation
The process of organizing a corporation generally consists of three stages which normally requires the aid
of legal, competent advisers. These three stages are discussed below:

1. Promotion – the incorporators make preliminary arrangements to set up a tentative working

organization and to solicit subscriptions to raise sufficient capital for the business.
2. Incorporation – the process of formalizing the organization of a corporation. This includes:
a. Drafting of the Articles of Incorporation which must be duly executed and acknowledged before a
notary public.
b. Filing of the articles of incorporation with the Securities and Exchange Commission (SEC).
c. After the required fees have been paid and upon approval of the articles of incorporation, the SEC
issues a certificate of incorporation, the date of which being considered as the date of registration or
incorporation.
3. Commencement of the business – the business should start its operations within two years from
the date of incorporation. Failure to do so will automatically dissolve the corporation without the need for
a hearing.
Costs incurred during incorporation, such as filing fees, cost of printing stock certificates, promoter’s
commission and legal fees, are known as organization costs or pre-operating costs. Under PAS 38
Intangible Assets, organization or pre-operating costs are charged to expense in the period incurred.
3.4. Corporate Records
The corporation generally maintains the following records to keep track of the various transactions:
1. Record of all business transactions (journals, ledgers, vouchers)
2. Minutes of all meetings of directors.
3. Minutes of all meetings of shareholders.
4. Stock and transfer book
a. Shareholder’s journal – chronological and numerical record of stock certificates issued.
b. Shareholder’s ledger – alphabetical record of individual shareholders.
c. Subscriber’s ledger – alphabetical record of individual subscribers.
5. Optional and supplementary records
3.5. Articles of Incorporation
The Articles of Incorporation enumerate the powers and limitations conferred upon the corporation by the
government. It includes the following information:

1. The name of the corporation;

2. The purpose or purposes for which the corporation is formed;
3. The place of the principal office of the corporation;
4. The term of existence of the corporation, if there is any;
5. The names, nationalities, and addresses of the incorporators;
6. The names of the directors;
7. The authorized share capital, the classes of share capital to be issued, and the number of shares and
terms of each class indicating the par value per share;
8. The amount of subscriptions to the share capital, the names of the subscribers and the number of
subscribed shares by each; and
9. The total amount paid on the subscriptions to the share capital and the amount paid by each
subscriber on his subscription.
3.6. By-Laws
The by-laws of the corporation supplement the articles of incorporation. It contains provisions for the
internal administration of the corporation. The corporate by-laws normally includes the following:

1. The date, place, and manner of calling the annual shareholders’ meeting;
2. The manner of conducting meetings;
3. The circumstances which may permit the calling of special meetings of the shareholders;
4. The manner of voting and the use of proxies;
5. The manner of electing the directors and the number of directors;
6. The term of office of the directors;
7. The authority and duties of the directors;
8. The manner of selecting the corporate officers;
9. The authority and responsibilities of the officers;
10. The procedure of amending the articles of incorporation; and
11. The procedure of amending the by-laws.

Module 11 - CORPORATE FORMATION

1. Introduction
This module demonstrates the procedures involved in accounting for share capital issuance of a
corporation. At the end of this module, learners will be able to record share capital transactions under
various considerations and instances.
3. SHARE CAPITAL (CAPITAL STOCK)
Share capital is also known as capital stock. It is the amount fixed by the corporate charter to be
subscribed and paid in or secured to be paid in by the shareholders of a corporation either in money or in
property, labor or services upon the organization of the corporation or afterwards; and upon which it is to
conduct its operations.

CLASSES OF SHARE CAPITAL

A corporation may issue two classes of share capital, namely, ordinary share capital (common
stock) and preference share capital (preferred stock). When a single class of share capital is issued, it
is an ordinary share capital.

Ordinary share capital entitles the holder to an equal or pro-rata division of profits without any preference
or advantage over any class of shares. Preference share capital entitles the holder to enjoy priority as to
distribution of dividends and distribution of assets upon corporate liquidation. Dividends are corporate
profits distributed to its shareholders.

All shareholders have the same basic rights. These rights are as follows:
1. To share in the distribution of corporate profit
2. To share in the distribution of assets upon corporate liquidation
3. To vote in shareholders’ meeting
4. To maintain one’s ownership interest in the corporation through purchase of additional shares when
a new share capital is issued. This is called the preemptive right.
Both preference and ordinary share capital may be issued with par, without par but with stated value, or
without par and without stated value.

A par value share capital has a nominal or face value stated on the face of the stock certificate and in the
articles of incorporation.

A no-par but with stated value share capital has a nominal value stated in the articles of incorporation
but not on the face of the stock certificate.

A no-par, no-stated value share capital has no nominal value stated either in the articles of incorporation
nor on the face of the stock certificate.

In our Corporation Code, a no-par share capital is to be issued for a consideration of not less than five
pesos.

3.1. PREFERENCE SHARE CAPITAL (PREFERRED STOCK)

A preference share capital is generally issued with a par value and a dividend rate. The holders of
preference shares have priority as to distribution of dividends and as to distribution of assets in the event
of corporate liquidation. This does not mean, however, that the holders are assured of regular receipt of
dividends. This only means that dividend requirements on preference shares must first be met before any
payment can be made to holders of ordinary shares.

A corporation may issue more than one class of preference shares. Preference shares may be classified as
follows:

1. Cumulative preference shares – entitle the holders to the receipt of previous years’ unpaid
dividends (dividend in arrears) before any payment can be made to ordinary shareholders upon dividend
declaration. This means that if dividend is not declared in a particular year, the right to such dividend is
not lost but carried forward to a subsequent year.

2. Non-cumulative preference shares – entitle the holders to the receipt of current dividends but not
on the previous years’ unpaid dividends. This means that if dividend is not declared in a particular year,
the right to such dividend is lost.

3. Participating preference shares – entitle the holders to the receipt of additional dividend after
holders of both preference and ordinary shares have been paid up to the current year’s dividend. This
means that the holders of preference shares have the right to share in extra dividends.

Participating preference shares may be fully participating or participating only up to a certain amount of
percentage.

4. Non-participating preference shares – entitle the holders to the receipt of dividends up to the
current period only. All extra dividends are given to holders of ordinary shares.

5. Convertible preference shares – entitle the holders the option to exchange the shares for some
other securities of the issuing corporation, normally ordinary shares.
6. Redeemable preference shares – entitle the issuing corporation the option to redeem or call the
shares at a certain call price.

3.2. ORDINARY SHARE CAPITAL (COMMON STOCK)

An ordinary share capital or common stock represents residual ownership equity. The holders of this
class of share capital carry the greatest risk. However, the ordinarily share in earnings to the greatest
extent if the corporation is successful.
4. AUTHORIZED SHARE CAPITAL
The maximum number of shares (both preference and ordinary shares) that a corporation may issue is
termed as authorized shares. The authorized share capital (authorized capital stock) is determined
by multiplying the authorized shares by the par or stated value of the share capital.

A corporation cannot issue shares more than the authorized shares stated in the articles of incorporation.
However, it may increase its authorized shares and authorized share capital by amending its articles of
incorporation.

Authorized share capital may be recorded under the memorandum entry method.

Illustrative Problem: The Emotional Company was organized on January 1, 2021 with authorized share
capital as follows:

10,000 shares of 10% preference share capital with a par value of P100 per share
200,000 shares of ordinary share capital with a par value of P10 per share

The entries to record authorized share capital are:

Jan. 1, 2021 Authorized to issue 10,000 shares of 10% preference share capital with a par value of
P100 per share.

1 Authorized to issue 200,000 shares of ordinary share capital with a par value of P10 per
share.

5. ISSUANCE OF SHARE CAPITAL

A share capital may be issued in exchange for cash, non-cash assets, services, liability or other form of
securities. It may also be sold on a subscription basis.
A share capital that is issued to a shareholder is called an outstanding share.
Direct costs incurred in the issuance of share such as printing, underwriting, accounting and legal fees are
charged to share premium or additional paid in capital arising from the issuance of shares.

5.1. ISSUANCE OF PAR VALUE SHARE

The following rules shall apply in the issuance of this class of share capital.

5.1.1 ISSUANCE FOR CASH. A share capital may be issued for cash equal to its par value or above par
value. If cash is received equal to its par value, Cash is debited and Share Capital is credited.
If the share capital is sold issued above its par value, Cash is debited for the amount received, Share
Capital is credited at par value, and Share Premium or Paid in Capital in Excess of Par is credited for the
excess of cash received over par value.

Illustrative Problem: The Smiley Corporation was organized on January 1, 2021 and is authorized to
issue 100,000 shares of P10 par value ordinary shares. Subsequently, 25,000 shares were sold.

The entries to record the sale of shares using two independent cases are presented as follows:

5.1.2 ISSUANCE IN EXCHANGE FOR NON-CASH ASSETS OR PROPERTY. When a share capital
is issued in exchange for non-cash assets, the asset received is recorded at its fair value (direct
measurement), unless the fair value cannot be estimated reliably. The fair value of the asset received shall
be determined at the date the entity receives the asset. If the fair value of the asset received cannot be
estimated reliably, it will be recorded at the fair value of the share capital issued (indirect
measurement). In the event both the fair values of the property and the shares are not known, the par
value of the shares shall be used in the measurement.

Illustrative Problem: The Smiley Corporation issued 10,000 shares of its P10 par ordinary share capital
in exchange for land.
Case 3 - The land and the ordinary shares have no known fair values.

Land 100,000
Ordinary share capital 100,000

5.1.3 ISSUANCE IN EXCHANGE FOR SERVICES RENDERED. When a share capital is issued in
exchange for services rendered, the services received is recorded at its fair value (direct measurement).
The fair value of the services received shall be determined at the date the other party renders the services.
If the fair value cannot be estimated reliably, it will be recorded at the fair value of the share capital
issued (indirect measurement). In the event both the fair values of the services and the shares are not
known, the par value of the shares shall be used in the measurement.

Illustrative Problem: The Smiley Corporation issued 1,000 shares of P10 par ordinary share capital in
payment for the services of the lawyer rendered during incorporation.

Case 3 - The services and the ordinary shares have no known fair values.

Pre-operating expenses 10,000

Ordinary share capital 10,000
5.1.4 SALE OF SHARE CAPITAL ON A SUBSCRIPTION BASIS. Subscription is a contract between
a subscriber (buyer of share capital) and a corporation (seller or issuer of share capital) whereby the
former purchases shares of stock of the latter with the payment to be made at a later date. The corporation
issues the corresponding stock certificate upon full payment of subscription.

Sale of share capital on a subscription basis involves three major transactions – receipt of subscription,
collection from subscribers, and issuance of stock certificate upon full payment of subscription.

Illustrative Problem: On June 3, 2021, the Smiley Corporation received subscription for 5,000 shares of
its P10 par value ordinary share capital at P15. A down payment of 25% was received and the balance
was paid in full on July 4, 2021. The following are the entries to record these transactions:
5.2. ISSUANCE OF NO-PAR BUT WITH STATED VALUE SHARE CAPITAL
The same rules discussed in the issuance of share capital with a par value are applicable. The account
Share Capital in Excess of Stated Value may be used instead of the account Share Premium or Share
Capital in Excess of Par.

5.2.1 ISSUANCE FOR CASH

Illustrative Problem: The Smiley Corporation was organized on January 1, 2021 and is authorized to
issue 100,000 shares P10 stated value ordinary share capital. Subsequently, 25,000 shares were sold.

The entries to record the sale of share capital under two independent cases are as follows:

5.2.2 ISSUANCE IN EXCHANGE FOR NON-CASH ASSETS OR PROPERTY

Illustrative Problem: The Smiley Corporation issued 10,000 shares of its P10 stated value ordinary share
capital in exchange for land. The entries to record the issuance of share capital under two independent
cases are as follows:

Case 3 - The land and the ordinary shares have no known fair values.

Land 100,000
Ordinary share capital 100,000
5.2.3 ISSUANCE IN EXCHANGE FOR SERVICES RENDERED
Illustrative Problem: The Smiley Corporation issued 1,000 shares of P10 stated value ordinary share
capital in payment for the services of the lawyer rendered during incorporation.

Case 3 - The services and the ordinary shares have no known fair values.

Pre-operating expenses 10,000

Ordinary share capital 10,000

5.2.4 SALE OF SHARE CAPITAL ON A SUBSCRIPTION BASIS. The sale of stock with stated value
on a subscription basis is recorded in the same manner as that of a stock with a par value. However, the
account Share Capital in Excess of Stated Value is credited instead of Share Premium or Share Capital in
Excess of Par.

Illustrative Problem: On June 3, 2021, the Smiley Corporation received subscription for 5,000 shares of
its P10 stated value ordinary share capital at P15. A down payment of 25% was received and the balance
was paid in full on July 4, 2021.

The entries to record these transactions are as follows:

5.3. ISSUANCE OF NO-PAR, NO-STATED VALUE SHARE CAPITAL
When a share capital has no par value and no stated value, the value assigned to the consideration
received is the same amount credited to the Share Capital account.

5.3.1 ISSUANCE FOR CASH. When a no-par, no-stated value stock is issued for cash, Cash is debited
and Share Capital is credited for the value of the cash consideration received.

Illustrative Problem: The Smiley Corporation was organized on January 1, 2021 and is authorized to
issue 100,000 shares of no-par, no-stated value ordinary share capital. Subsequently, 25,000 shares were
sold at P15 per share.

5.3.2 ISSUANCE IN EXCHANGE FOR NON-CASH ASSETS OR PROPERTY

Upon issuance of the shares, Share Capital is credited for the value assigned to the asset received.

Illustrative Problem: The Smiley Corporation issued 10,000 shares of its ordinary share capital in
exchange for land.

5.3.3 ISSUANCE IN EXCHANGE FOR SERVICES RENDERED

Illustrative Problem: The Smiley Corporation issued 1,000 shares of its ordinary share capital in
payment for the services of the lawyer rendered during incorporation.
5.3.4 SALE OF SHARE CAPITAL ON A SUBSCRIPTION BASIS. The sale of no-stated value share
capital on a subscription basis is recorded in the same manner as that of share capital with a par value or
stated value, except that the entire subscription price is credited to the Share Capital account.

Illustrative Problem: On June 3, 2021, the Smiley Corporation received subscription for 5,000 shares of
its no-par, no stated value ordinary share capital at P15. A down payment of 25% was received and the
balance was paid in full on July 4, 2021.

The entries to record these transactions are as follows:

6. SUBSCRIPTION DEFAULTS
When a subscriber fails to pay his obligations after the corporation has sent several notices to him, his
subscribed shares are declared delinquent shares. His subscription is declared delinquent subscription.
Such delinquent subscription is then offered for sale in a public auction and delinquent shares are issued
to the highest bidder. The highest bidder is the one who is willing to pay for the unpaid subscription plus
any expense incurred in connection with the delinquency sale and is willing to receive the least number of
shares.
The following entries are made in relation to subscription defaults and issuance of stock certificates.
All subscribed shares are issued. Shares are first given to the highest bidder. The excess, if any, are given
to the defaulting subscriber.

If there is no bidder, all of the delinquent shares will be issued in the name of the corporation. Such shares
are considered treasury shares and the following entries will be made, after making the entries (a) and (b)
above:

Illustrative Problem: On June 15, 2021, The Smiley Corporation received subscription for 2,000 shares
of its P10 par value ordinary share capital of P15. A down payment of 60% was received. The final
payment was due on August 15, 2021, although several notices were sent to the subscriber, no payment
has been received. On August 31, the subscription was declared delinquent and was offered for sale in a
public auction. On September 6, expenses of P500 were incurred in connection with the delinquency sale.
On September 21, payment was received from the highest bidder and shares were issued – 1,500 to the
highest bidder and 500 to the defaulting subscriber.

The entries to record the foregoing transactions follow:

Module 12 - CORPORATE OPERATIONS

1. Introduction
This module demonstrates the procedures involved in the distribution of dividends to both preference and
ordinary shareholders. At the end of this module, the learners will be able to compute for the total
dividends and dividend per share of each class of share capital under various assumptions.

3. ACCOUNTING CYCLE OF A CORPORATION

The accounting cycle of a corporation is essentially the same as that of a sole proprietorship and a
partnership. Transactions are recorded in the same manner as that of the other two forms of business
organizations.

Financial statements are the end product of the accounting process. PAS 1 provides that a complete set of
financial statements shall be composed of the following:

1. Statement of financial position (balance sheet)

2. Statement of comprehensive income
3. Statement of changes in equity
4. Statement of cash flows
5. Notes

4. STATEMENT OF FINANCIAL POSITION OF A CORPORATION

The balance sheet reports the financial condition of a company as of a particular date. The equity section
of the statement of financial position of a corporation is called shareholders’ equity or stockholders’
equity and is generally composed of Contributed Capital and Retained Earnings.

CONTRIBUTED CAPITAL. The contributed capital represents corporate capital arising from investment
by shareholders. It is further divided into two sections:

1. Share capital or capital stock – this is also known as legal capital. This section reports both
preference (preferred) and ordinary (common) share capital issued, subscribed and distributable as
dividends, stated at par or stated value. In case of share capital without par nor stated value, the amount
reported is the total value of the consideration received in exchange for the shares.

Share capital subscription receivables that are not currently collectible are shown as a deduction from
share capital subscribed.

2. Additional Paid-in Capital – this section reports investment by shareholders in excess of the par
value or stated value of the share capital. It includes paid-in capital in excess of par value or stated value
(share premium) of both preference and ordinary share capital.

RETAINED EARNINGS (EARNED SURPLUS). The Retained Earnings balance represents

undistributed earnings of the corporation. It represents capital of the corporation arising from its
operations. The balance of the account is generally divided in to two parts:

1. Appropriated Retained Earnings – it is the portion of Retained Earnings set aside for a specific
purpose.
2. Unappropriated Retained Earnings – it is the portion of Retained Earnings available for
distribution as dividends to the shareholders. It is normally described as “unrestricted earnings”.

The Retained Earnings account has a normal credit balance. A debit balance in the account is called
a deficit.

5. DIVIDENDS
Dividends are distribution to shareholders of corporate earnings in proportion to the number of shares
held by them. Distributions may take the form of (1) cash, (2) non-cash assets, (3) notes or other evidence
of corporate indebtedness, (4) shares of the company’s own share capital.

Dividends described are paid out of accumulated earnings of the corporation. They may also be paid as a
return of shareholders’ invested capital. This type of dividend is called liquidating dividend.

The power to declare dividends is vested upon the board of directors.

The following dates are essential in formal dividend announcement:

1. Date of declaration – this is the date when the board of directors approved the resolution to
distribute dividends. The liability of the corporation to the shareholders is recorded on this date.

2. Date of shareholders of record – this is the date when the company determines the shareholders
who are entitled to the receipt of the declared dividends. No entry is required on this date. However, a list
of registered shareholders is made as of the close of business on this date. Share capital are selling
dividends-on prior to this date and are selling ex-dividends the day following this date.

3. Date of payment or distribution – this is the date when the dividends declared are paid or
distributed to the shareholders. The liability recognized on the date of declaration is cancelled or
extinguished on this date.

TYPES OF DIVIDENDS
1. Cash dividend – payment is in the form of cash
2. Share capital dividend (stock dividend) – payment is in the form of corporation’s own share
capital
3. Property dividend – payment is in the form of noncash assets as inventories and share capital of
other corporations.
4. Scrip dividends – a deferred cash dividend, consists of a written promise to pay at some future
date including interest.
5. Liquidating dividend – represents return of capital to shareholders, a violation of Trust Fund
Doctrine.

Trust Fund Doctrine – the share capital of the corporation is considered as trust fund for the protection
of the creditors, hence, it is illegal to return the legal capital to the shareholders during the lifetime of the
corporation.
5.1. CASH DIVIDENDS
Cash dividends are dividends that are distributable in the form of cash. This is the most common type of
dividend. The following entries are made to record the declaration and the subsequent payment:

If the dividends declared are still unpaid as of the statement of financial position date, the balance of the
account Cash Dividends Payable is reported as a current liability.

The amount of cash dividends declared should not exceed the amount of cash reported on the statement of
financial position or cash needed for current operations.

Cash dividends may either be:

1. Peso Dividend – a cash dividend expressed in peso amount. The peso dividend multiplied by the
number of outstanding shares of the corporation equals the total amount of Retained Earnings declared as
cash dividends. The peso dividend multiplied by the number of capital shares held by a shareholder
equals the total amount of cash dividends to be received by the shareholder.

2. Percentage dividend – a cash dividend expressed in percentage. The dividend percentage multiplied
by the par value or stated value of the capital share equals the peso dividend.

Illustrative Problem: Summer Corp. has 10,000 shares of P100 par value ordinary share capital
outstanding as of December 1, 2021. On this date, the Board of Directors declared a cash dividend of P10
per share to shareholders of record of December 30, 2021 payable on January 15, 2022.

The Dividends Payable account would be reported in the December 31, 2021 statement of financial
position as a current liability.
5.2. SHARE CAPITAL DIVIDENDS (STOCK DIVIDENDS)
A share capital dividend (stock dividend) is a distribution to shareholders in the form of the corporation’s
own share capital.

This type of dividend does not affect total assets and total shareholders’ equity, it simply represents a
transfer of capital from retained earnings to contributed capital. Therefore, total shareholders’ equity
before and after the declaration and distribution of share capital dividends are the same. Retained
Earnings is decreased while contributed capital is increased as a result of the declaration and distribution
of share capital dividends.

In recording the declaration of a share capital dividend, a distinction should be made between a small and
large stock dividend. A share capital dividend representing less than 20% of the outstanding shares is
considered a small share capital dividend. A share capital dividend representing 20% or more of the
outstanding shares is considered a large share capital dividend.

Under a small share capital dividend, retained earnings is debited for the fair value of the share capital on
the date of declaration; under a large share capital dividend, retained earnings is debited for the par or
stated value of the share capital.

The entries to record the declaration and distribution of share capital dividends follow:

Small Share Capital Dividend

Large Share Capital Dividend

The account Share Capital Dividend Distributable is credited for the par value or stated value of the
shares to be distributed regardless of whether the share capital dividend is small or large. The account is
reported on the statement of financial position under the shareholders’ equity section as part of
Contributed Capital. It is properly shown as an addition to the share capital outstanding.
The account Paid-in Capital from Share Capital Dividend is credited for the excess of the fair market
value of the share over its par or stated value. This account is reported on the statement of financial
position under the shareholders’ equity section as part of additional paid-in capital.

Illustrative Problem: Summer Corp. has 10,000 shares of P100 par value ordinary share capital
outstanding as of December 1, 2021. On this date, the Board of Directors declared a share capital
dividend distributable to shareholders of record of December 30, 2021 payable on January 15, 2022. The
fair market value of Summer Corp. share capital on December 1 is P105; on December 30, P110; on
January 15, P106.
The entries to record the declaration and distribution of share capital dividend using two independent
cases are presented below:

Case 1 – A share capital dividend of 10% was declared.

Case 2 – A share capital dividend of 30% was declared.

The declaration and distribution of share capital dividends, whether small or large, increase the number of
capital shares outstanding.
In the two different types of dividends discussed, it should be noted that only the outstanding capital
shares are entitled to dividends.