Chapter 5 • Transferable ownership rights
Accounting for Corporations • Management is centralized in the Board of
Corporation- 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.
-A corporation is an entity recognized by law as
possessing an existence separate and distinct
from its owners; that is, it is a separate legal
entity.
ATTRIBUTES OF A CORPORATION
1. Artificial being with a personality separate and
apart from its individual shareholders or
members.
2. Created by operation of law.
3. Enjoys the right of succession.
4. Has the powers, attributes and properties
expressly authorized by law or incident to its
existence.
COMPARISON BETWEEN PARTNERSHIP AND
CORPORATION
ADVANTAGES OF A CORPORATION
• Separate legal entity
• Limited liability of stockholders
• Continuous life
Directors
• Lack of mutual agency for stockholders
• Ease of capital accumulation
DISADVANTAGES OF A CORPORATION
• Complicated in formation and management
• Governmental regulation
• High cost of formation and operation
• Heavier taxation than other forms of business
organizations
• Minority shareholders are subservient to the
wishes of the majority
• Management and control have been separated
from ownership
• Transferability of shares permits the uniting of
incompatible and conflicting
elements in one venture.
CLASSES OF CORPORATIONS
Section 3 of the Revised Corporation Code
classified private corporations
into:
1. Stock corporation – Corporations which have
share capital divided into shares and are
authorized to distribute to the holders of such
shares dividends or allotments of the surplus
profits on the basis of the shares held. a type of
for-profit company
2. Non-stock corporation – Corporations which
do not have share capital
According to number of persons:
1. Corporation aggregate – consisting of more
than one corporator.
2. Corporation sole or a special form of
corporation usually associated with the clergy
– consists of only one member or corporator and
his successors such as a bishop.
According to nationality:
1. Domestic corporation – organized under
Philippine laws.
2. Foreign corporation – organized under
foreign laws.
According to whether for public or private
purpose:
1. Public corporation – formed for the
government of a portion of the state
2. Private corporation – created for private aim,
benefit or purpose
According to whether for charitable purpose
or not:
1. Ecclesiastical corporation – organized for
religious purposes
2. Eleemosynary corporation – established for
public charity
3. Civil corporation – established for business or
profit
According to their legal right to corporate
existence:
1. De jure corporation – existing in fact and in
law.
2. De facto corporation – existing in fact but not
in law.
According to degree of public participation
with regard to their share ownership:
1. Close corporation – share ownership is
limited to selected persons or member of a family
not exceeding 20 persons.
2. Open corporation – the share is available for
subscription or purchase by any person.
3. Publicly-held corporation – a class of equity
securities listed on an exchange or with assets in
excess of P50,000 and having 200 or more
holders, at least 200 of which are holding at least
100 shares of a class of its equity securities.
According to their relation to another
corporation:
1. Parent or holding corporation – a
corporation that is related to another corporation
that it has the power to either directly or indirectly
elect the majority of the directors of a subsidiary
corporation.
2. Subsidiary corporation – a corporation
controlled by another corporation known as a
parent corporation.
STEPS IN THE CREATION OF A
CORPORATION
1. PROMOTION- It is the process of bringing
together the incorporators or the persons
interested in the business, of procuring
subscriptions or capital for the corporation and of
setting in motion the machinery that leads to the
incorporation of the corporation itself.
2. INCORPORATION- Verification from the
records of the Securities and Exchange
Commission (SEC) that the proposed corporate
name is not the same or similar to an existing
corporation.
3. FORMAL ORGANIZATION AND
COMMENCEMENT OF BUSINESS
OPERATIONS- Formal organization requires the
adoption of by-laws and the election of the board
of directors and of the administrative officers.
BY-LAWS- The rules of action adopted by the
corporation for its internal government and for the
government of its officers, shareholders or
members.
-shall be effective only upon the issuance by the
Commission of a certification that the bylaws are
in accordance with the Revised Corporation
Code.
-Failure to file a code of by-laws shall render the
corporation liable for the revocation of its
registration.
COMPONENTS OF A CORPORATION
1. Corporators, Incorporators, Shareholders,
Members
2. Subscribers – persons who have agreed to
take and pay for original, unissued shares of a
corporation formed or to be formed.
3. Promoters – persons who bring about or
cause to bring about the formation and
organization of a corporation.
4. Underwriters- investment bankers
5. Independent director– person who apart from
his fees and shareholdings is independent of
management and free from any business
CLASSES OF SHARES IN GENERAL
1. Par value shares. One in which a specific
amount is fixed in the articles of incorporation and
appearing on the certificate of stock.
2. No-par value shares. One without any value
appearing on the face of the certificate of stock.
(minimum- 5pesos)
3. Voting shares. Those issued with the right to
vote.
4. Non-voting shares. Those issued without the
right to vote.
5. Ordinary shares. These shares entitle the
holder to an equal pro-rata division of
profits without any preference.
6. Preference shares. These shares entitle the
holder to certain advantages or benefits over the
holders of ordinary shares.
7. Promotion shares. Those issued to promoters
as compensation in promoting the incorporation
of a corporation, or for services rendered in
launching or promoting the welfare of the
corporation.
8. Treasury shares. A stock that has been issued
by the corporation as fully paid
and later reacquired but not retired.
9. Convertible shares. A stock which is
convertible or changeable from one class to
another class.
10.Authorized shares. The maximum number of
shares which a corporation may issue.
11.Issued shares. Shares issued to shareholders
which at present may or may not be in the hands
of the shareholder.
12.Unissued shares. Shares which never been
issued and are available for issuance.
13.Outstanding shares. Shares issued to
shareholders or subscribers whether fully or
partially paid except for treasury shares.
14.Subscribed shares. Shares which investors
have contracted to acquire.
Shareholders- owners
Board of Directors- responsible for the
formulation of policies
President- must be a director but cannot act as
president and secretary or as president and
treasurer at the same time.
Corporate Secretary- make and keep its records
and to make proper entries of the votes,
resolutions and proceedings
Corporate Treasurer- receive and keep the
money of the corporation and to disburse
CORPORATE BOOKS AND RECORDS
• Minutes book. It contains the minutes of the
meetings of the directors and shareholders.
• Stock and transfer book. It is the record of the
names of shareholders, installments paid and
unpaid by shareholders and dates of payment,
any transfer of stock and dates thereof, by whom
and to whom made.
• Books of accounts. These represent the
record of all business transactions.
• Subscription book. It is a book of printed blank
subscription.
• Shareholders’ ledger. It is a ledger which
details the number of shares issued to each
shareholder.
• Subscribers’ ledger. It is a subsidiary ledger
for the subscriptions receivable account; it reports
the individual subscriptions of the subscribers.
• Stock certificate book. It is a book of printed
blank certificates of stock.
Chapter 6
Share Capital
Share Capital- shares subscribed and paid in or
secured to be paid in shareholders either money,
property or services.
Legal Capital- contributed by shareholders
comes from the sale of shares of stock.
Share Premium- amounts paid in by
shareholders in excess of par.
2 Basic Types of Shares
Ordinary Shares- basic ownership class of the
corporation. Residual entity
Preference Shares- special benefits relate either
to the receipt of dividends when declared before
the ordinary shareholders.
TERMS RELATED TO SHARE CAPITAL
Authorized Share Capital- number of authorized
shares indicated the maximum number of shares
a corporation can issue
Issued Share Capital- shares which have been
sold and paid in full.
Subscribed Share Capital- subscribed but not
yet fully paid.
Outstanding Share Capital- shares in the hands
of the shareholders. Issued shares-treasury
shares=outstanding share
Treasury Stock-acquired but not retired, awaiting
to be reissued.
Shares for Services- issue shares in exchange
for legal, accounting or other services.
Organization Expense- may be debited at an
amount equal to the fair value pof such services.
Chapter 7
Retained Earnings
Prior period errors are errors discovered in
the current period that are of such
significance that the financial statements of
one or more prior periods can no longer be
considered to have been reliable at the date
of their issue. Note that credit entries increase
the retained earnings balance and debits
decrease it.
A debit balance in the Retained Earnings
account resulting from accumulated losses is
called a deficit. Retained earnings may be
restricted or appropriated, and unrestricted or
unappropriated. Unrestricted retained
earnings are free and can be declared as
dividends. Retained earnings restrictions may
be legal, contractual or voluntary.
Retained earnings is not a cash fund waiting
to be distributed as dividends, Instead, it is an
owner's equity account representing claim on
all assets in general and not on any
asset in particular
Dividends may take the form of cash, property
or additional shares of stock of the
corporation
Date of Record
A list of shareholders entitled to the declared
dividends is prepared at the date of record.If
an investor buys a share of stock after this
date,he will not receive the dividend. The
share is said to be traded ex-dividend. No
entry is required on this date.
Date of Payment
The corporation settles its liability on this date.
An entry is made debiting the dividend liability
or shares distributable account and crediting
cash, property distributed or share capital.
CASH DIVIDENDS
Majority of dividends distributed by
corporations is paid in cash. In declaring cash
dividends, a corporation must have both an
appropriate amount of retained earnings and
the necessary amount of cash. Some
investors view that a large retained earnings
balance automatically permits generous
dividend distributions.
Small Share Dividends
Small share dividends are dividends in which
the additional shares issued are less than
20% of the previously outstanding shares.
These share dividends are recorded by
transferring from retained earnings to share
capital (ordinary shares and share premium
accounts) the fair market value of the
additional shares to be issued. In cases when
the fair market value is lower than the par or
stated value, the par or stated value will be
the basis for recording.
Large Share Dividend
if the share dividend is 20% or more of the
previously outstanding shares such that the
effect is to reduce materially the market value
per share,then only the par or stated value is
credited to ordinary shares with a
corresponding debit to retained earnings.
Liquidating Dividends
Liquidating dividends are not distributions of
earnings but rather returns of capital of
the investing shareholders. This type of
dividend can be legally paid only under either
of the following circumstances: (1) when the
corporation is under dissolution and
liquidation or (2) when the corporation is
engaged in the exploration of natural
resources
SHARE SPLITS
corporations reduce the par or stated value of
its share capital and issues additional shares
to its shareholders through the referred to as
share splits. The par or stated value per share
will decrease with a corresponding increase in
the number of authorized ,issued and
outstanding shares in effect, there is no
changes in the balances of the shareholders'
equity accounts.
Non-Cumulative Preference Shares.
These shares entitle the holders only to the
payment of current dividends, fi and when
dividends are declared, to the extent of the
preference rate, before the ordinary
shareholders are paid.
Cumulative Preference Shares. These
shares entitle the holder to payment not only
of current dividends but also of back
dividends or dividends in arrears, fi and when
dividends are declared, before the ordinary
shareholders are paid.
Non Participating Preference Shares.
These shares entitle the holders only to the
extent of the stipulated preference dividend.
Participating Preference Shares. These
shares entitle the holder to participate with
the holders of ordinary shares pro-rata in in
the remainder after the ordinary shareholders
have received their initial share based on the
preference rate.
RESTRICTIONS ON RETAINED EARNINGS
A corporation may be required by law or
contractual arrangements to set aside a
portion of the retained earnings for specified
purposes. In addition, the board of
directors may voluntarily designate a portion
of retained earnings for future expenses,
contingencies or other purposes (SFAS No.
18, par. 31). This portion of the retained
earnings is referred to as restricted or
appropriated retained earnings.

BOOK VALUE PER SHARE

Book value per share is the amount that
would be paid on each share if the
corporation is liquidated. The amount
available to shareholders is exactly the
amount reported as Shareholders’
equity.When only a single class of shares
outstanding, the book value per share is
computed by dividing the total shareholders
equity by the number of shares outstanding.