ACCOUNTING FOR CORPORATIONS
A corporation is an artificial being created by operation
by law, having the right of succession and the powers,
attributes and properties expressly authorized by law or
incident to its existence (The Corporation Code of the
Philippines, Sec. 2).
Attributes of a Corporation
ARTIFICIAL BEING- A corporation is an artificial being
with a personality separate and apart from its individual
shareholders or members.
CREATED BY OPERATION OF LAW
-It cannot come into existence by mere agreement of
the parties as in the case of business partnerships.
-Corporations require special authority or grant the
State, either by a special incorporation law that directly
creates the corporation or by means of a general
corporation law.
RIGHT OF SUCCESSION
-A corporation has the capacity of continued existence
subject to the period stated in the Articles of
Incorporation.
- The death, withdrawal, insolvency or incapacity of the
individual shareholders or members will not dissolve
the corporation.
- The transfer of ownership of shares of stock does not
dissolve the corporation.
It has the powers, attributes and properties expressly
authorized by law or incident to its existence
Advantages of a Corporation
1. The corporation has the legal capacity to act as a
legal entity.
2. Shareholders have limited liability
3. It has continuity of existence.
4. Shares of stock can be transferred without the
consent of the other shareholders.
5. Its management is centralized in the board of
directors.
6.Shareholders are not general agents of the business.
Greater ability to acquire funds.
Disadvantages of a Corporation
-A corporation is relatively complicated in formation
and management.
-There is a greater degree of government control and
supervision.
-It requires a relatively high cost of formation and
operation.
-It is subject to heavier taxation than other forms of
business organizations.
-Minority shareholders are subservient to the wishes of
the majority.
-In large corporations, management and control have
been separated from ownership.
-Transferability of shares permits the uniting of
incompatible and conflicting elements in one venture.
CLASSES OF CORPORATION
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.
Non-stock corporation
-A non-stock corporation is one where no part of its
income is distributable as dividends to its members,
trustees or officers.
-Any profit that a non-stock corporation may obtain as
an incident to its operation may obtain as an incident to
its operation shall, whenever necessary or proper, be
used for the furtherance of the purpose or purposes for
which the corporation was organized (The Corporation
Code of the Philippines, Sec.87).
Non-stock corporations may be formed or organized for
charitable, religious, educational, professional, cultural,
recreational, fraternal, literary, scientific, social, civic
service , or similar purposes (Sec. 88).
Other Classifications
According to number of persons:
1. Corporation aggregate. A corporation consisting of
more than one corporator.
2. Corporation sole or a special form of corporation
usually associated with the clergy. It is a corporation
which consists of only one member or corporator and
his successors such as bishop.
According to nationality:
1. Domestic corporation. A corporation organized
under Philippines laws.
2. Foreign corporation. A corporation organized under
foreign laws.
According to whether for public or private purpose:
1. Public corporation. A corporation formed or
organized for the government of a portion of the state
(e.g., provinces, cities, municipalities and barangays).
2. Private corporation. A corporation created for
private aim, benefit or purpose.
According to whether for charitable purpose or not:
1. Ecclesiastical corporation. Those organized for
religious purposes.
2. Eleemosynary corporation. Those established for
public charity.
3. Civil corporation. Those established for business or
profit.
According to their legal right to corporate existence:
1. De jure corporation. A corporation existing in fact
and in law. It is organized in strict conformity with the
law.
2. De facto corporation. A corporation existing in fact
but not in law.
According to degree of public participation with regard
to share ownership:
1. Close corporation. A corporation whose share
ownership is limited to selected persons or members of
a family not exceeding 20 persons.
2. Open corporation. A corporation where the share is
available for subscription or purchase by any person.
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. This step includes the following
a. 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.
b. Drafting and execution of the articles of
incorporation by the incorporators. The persons elected
as temporary treasurer should execute an affidavit
regarding the share capital subscribed and paid up. The
treasurer should also submit a sworn statement of
assets and liabilities of the corporation.
c. Deposit by the treasurer of the cash paid for the
shares subscribed in the bank in the name of the
treasurer in trust for and to the credit of the
corporation. The bank is required to issue a certificate
of deposit.
d. Filing of the articles of incorporation with the SEC
together with treasurer’s affidavit, statement of
financial position, certificate of bank deposit, and
certificate as to the name of the corporation;
e. Payment of the filing and publication fees; and
f. Issuance by the SEC of the certificate of incorporation.
3.Formal organization and commencement of business
operation.
-Formal organization requires the adoption of by-laws
and the election of the board of directors and of the
administrative officers.
- It also includes the taking of such other steps as are
necessary to enable the corporation to transact the
legitimate business or accomplish the purpose for which
it was created.
Date of Incorporation- 2 years
Section 22 of the Corporation Code states that if a
corporation does not formally organize and
commence the transaction of its business within two
(2) years from the date of its incorporation, its
corporate powers shall cease and the corporation shall
be deemed dissolved.
However, if a corporation has commenced business but
subsequently becomes continuously inoperative for a
period of at least five (5) years, the same shall be a
ground for the suspension or revocation of its
certificate of incorporation.
Date of Commencement- 5 years
However, if a corporation has commenced business but
subsequently becomes continuously inoperative for a
period of at least five (5) years, the same shall be a
ground for the suspension or revocation of its
certificate of incorporation.
Articles of Incorporation
In the Philippines, the general law which governs the
creation of private corporations is the Corporation Code
of the Philippines. Section 14 provides that all
corporations organized under this Code shall file with
the Securities and Exchange Commission articles of
incorporation in any of the official languages duly
signed and acknowledged by all of the incorporators,
containing substantially the following matters except as
otherwise prescribed by this Code or by special law;
1. The name of the corporation;
2. The specific purpose or purposes for which the
corporation is formed;
3. The principal place of business which must be
within the Philippines;
4. The term of existence;
5. The names, nationalities and residences of the
incorporators;
6. The number of directors or trustees, which shall not
be less than five (5) nor more than fifteen (15);
7. The names, nationalities and residence of the
persons who shall act as directors or trustees until
the first regular directors or trustees are elected
and qualified.
8. If it be a stock corporation:
a. Amount of authorized share capital in pesos,
b. Number of shares into which it is divided,
c. In case the shares are par value shares:
- the par value of each share,
- names, nationalities and residences of the
original subscribers,
- the amount subscribed and paid by each
subscriber on his subscription
d. In case of no par value, the articles need only state
such fact, and the number of shares into which said
share capital is divided.
9. If it be a non-stock corporation, the amount of its
capital, the names, nationalities and residences of the
contributors and the amount contributed.
BY-LAWS
These are the rules of action adopted by the
corporation for its internal government and for the
government of its officers, shareholders or members.
The by-laws shall be adopted within one month from
the issuance of the certificate of incorporation by the
Securities and Exchange Commission. Failure to file a
code of by-laws shall render the corporation liable for
the revocation of its registration. A private corporation
may provide in its by-laws for:
1. The time, place and manner of calling and
conducting regular or special meetings of the
directors or trustees;
2. The time and manner of calling and conducting
regular or special meetings of the shareholders
or members;
3. The required quorum in meeting of
shareholders or members and the manner of
voting therein;
4. The form for proxies of shareholders and
members and manner of voting them;
5. The qualifications, duties and compensation of
directors or trustees, officers and employees;
6. The time for holding the annual election of
directors or trustees and the mode or manner
of giving notice thereof;
7. The manner of election or appointment and the
term of office of all officers other than directors
or trustees;
8. The penalties for violation of the by-laws;
9. In the case of stock corporations, the manner of
issuing stock certificates; and
10. Such other matters as may be necessary for the
proper or convenient transaction of its
corporate business and affairs.
Rights of a Shareholder
The following are some of the rights of a shareholder:
1. Right to be issued certificate of stock or other
evidence of share ownership and to transfer
such shares.
2. Right to attend and vote in person or by proxy
at shareholders’ meetings.
3. Right to elect and remove directors.
4. Right to adopt, amend or repeal the by-laws.
5. Right to purchase a portion of any new shares
issued to maintain the same percentage of
stock ownership. This right is known as the pre-
emptive right. However, this right is not
absolute and may be denied.
6. Right to receive dividends when declared.
7. Right to inspect corporate books and records,
and to receive financial reports of the
corporation’s operations
8. Right to participate in the distribution of
corporate assets upon dissolution.
Components of a Corporation
Corporators
-are those who compose a corporation whether as
shareholders or members, at any time.
-This term includes incorporators, shareholders or
members (Sec.5).
Note: A corporation or a partnership can be a
corporator, but cannot be an incorporator. A
partnership can be a corporator in a corporation but a
corporation cannot be a general partner in a
partnership.
Incorporators (5-15)
-are shareholders or members mentioned in the articles
of incorporation as originally forming and composing
the corporation and are signatories to said articles of
incorporation (Sec.5 ).
-They must be natural persons ( i.e. human beings) as
distinguished from artificial beings (e.g., a corporation
or a partnership).
-An incorporator will always retain his status as such
though no longer having an interest in the corporation.
The Code specifies that five or more persons, not
exceeding fifteen, may form a private corporation
provided that they are of legal age, owners or
subscribers to at least one share of capital stock and
that the majority are residents of the Philippines.
Note: All incorporators (if they continue to be
shareholders ) are corporators of a corporation, but
not all corporators are incorporators.
Shareholders
 stockholders
 are corporators in a stock corporation. (Sec. 5).
 Shareholders may be natural or juridical persons.
Members
are corporators of a non-stock corporation (Sec. 5).
Subscribers
are persons who have agreed to take and pay for
original, unissued shares of a corporation formed or to
be formed .
Note: All incorporators are subscribers but a subscriber
need not be an incorporator.
Promoters
are persons who bring about or cause to bring about
the information and organization of a corporation.
Underwriters
are usually investment bankers who have-
 agreed, alone or with others, to buy at stated terms
an entire or a substantial part of an issue of
securities; or
 guaranteed the sale of an issue by agreement to
buy from the issuing corporation any unsold portion
at a stated price; or
 agreed to use his best efforts to market all or part
of an issue; or
 offered for sale shares he has purchased from a
controlling stockholders
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.
The par value is the minimum issue price of the shares.
2. No-par value shares.
 One without any value appearing on the face of
the certificate of stock.
 A no-par value share may have a stated value
which may be fixed in the articles of
incorporation or by the board of directors or
the shareholders.
 Thus, the issue price may vary from time to
time as it is usually fixed based on the book
value of the corporation’s shares.
3. However, the minimum stated value of a no-par
value share is five pesos (P5.00) per share (Sec. 6).
Banks, trust companies, insurance companies, public
utilities, and building and loan associations area not
permitted to issue no-par value shares of stock.
4. Voting shares. -Those issued with the right to vote.
5. Non-voting shares. -Those issued without the right to
vote.
6. Ordinary shares. -These shares entitle the holder to
an equal pro-rata division of profits without any
preference.
7.Preference shares-These shares entitle the holder to
certain advantages or benefits over the holders of
ordinary shares.
8. 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.
9. Treasury shares. - A stock that has been issued by the
corporation as fully paid and later reacquired but not
retired.
10. Convertible shares. A stock which is convertible or
changeable from one class to another class.
25% - 25% rule - CORPORATION
Mnimum Subscription and Paid-In Capital
At the time of incorporation, at least twenty-five (25%)
percent of the authorized capital stock (or share
capital) as stated in the articles of incorporation must
be subscribed and at least twenty-five (25%) percent of
the total subscription must be paid upon subscription,
the balance to be payable on a date or dates fixed in the
contract of subscription without need of a call, or in the
absence of a fixed date or dates, upon call for payment
by the Board of Directors.
In no case shall the paid-in capital be less than five
thousand (5,000) pesos (The Corporation Code of the
Philippines, Sec. 13). In practice, the SEC requires
higher minimum capital requirements for particular
types of corporations.
Minimum Subscription and Paid-In Capital
-These requirements are mandatory.
-The Securities and Exchange Commission shall not
accept the articles of incorporation of any stock
corporation unless accompanied by a sworn statement
of the treasurer elected by the subscribers showing that
the minimum subscription and paid-in capital
requirements have been complied with.
-Observe that the New Corporation Code used the term
“total” subscription as the basis for the application of
the second 25%. It is not necessary that each and every
subscriber shall pay twenty-five percent of his
subscription. It is enough that twenty-five percent of
the total subscription is paid.
Minimum Subscription and Paid-In Capital
Illustration. Assume that the authorized share capital is
P2,000,000 divided into 20,000 shares with a par value
of P100 per share. The subscribed share capital must be
P500,000 which is 25% of the authorized share capital
of P2,000,000. The paid-in-capital should be P125,000
which is 25% of the subscribed share capital of
P500,000.
Suppose that the authorized share capital is P60,000
divided into 6,000, P10 par value shares. Applying the
25%-25% rule, the paid-in capital will only amount to
P3,750. The incorporators must pay P5,000 because this
is the minimum paid-in capital required by law.
Minimum Subscription and Paid-In Capital
In case of no-par value shares, the 25% requirement will
be based on the authorized number of shares. If the
authorized capital is pegged at 2,000 no-par value
shares, then at least 500 no-par value shares must be
subscribed.
Shareholders
-owners of the corporation
Board of directors
-elected by the shareholders
-responsible for the formulation of the overall policies
for the corporation and for the exercise of corporate
powers.
-elects chairman of the board
-designate professional management team or
administrative officer
President
-must be a director of the corporation, but he cannot
act as president and secretary or as president and
treasurer at the same time.
-the president is the only officer required by law to be a
director
Corporate Secretary
-must be a resident and citizen of the Philippines
-it is generally the duty of the secretary to make and
keep its records and to make proper entries of the
votes, resolutions and proceedings of the shareholders
and directors in the management of the corporation.
Corporate Treasurer-is the proper officer entrusted
with the authority to receive and keep the money of the
corporation and to disburse them as he may be
authorized.
CORPORATE BOOKS AND RECORDS
Stock and transfer book - It is a record of the names of
shareholders , installment 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 transaction. The books accounts normally
include the journal and the ledger.
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.
SHARE CAPITAL
-The owners’ equity section of a corporation’s
statement of financial position is called shareholders’
equity.
SHAREHOLDER'S EQUITY
SHARE CAPITAL
Preference Shares xx
Ordinary Shares xx
Share Premium xx
Total Share Capital XX
RETAINED EARNINGS xx
TOTAL SHAREHOLDERS' EQUITY XX
SHARE CAPITAL- reflects the amount of resources
received by a corporation as a result of investment by
shareholders, donations or other share capital
transactions.
RETAINED EARNINGS- (or accumulated profits or losses
) is the amount of capital accumulated and retained
through the profitable operations of the business
SHARE CAPITAL- It is the shares to be subscribed and
paid in or secured to be paid in by the shareholders,
either in money, property or services, at the time of
organization of the corporation or afterwards, and upon
which it is to conduct its operations.
LEGAL CAPITAL- Legal capital is that portion of the
contributed capital or the minimum amount of paid-in
capital, which must remain in the corporation for the
protection of corporate creditors
Determination of LEGAL CAPITAL
PAR VALUE- is the aggregate par value of all issued and
subscribed shares.
NO PAR VALUE- the total consideration received by the
corporation for the issuance of its shares to the
shareholders including the excess of issue price over the
stated value (Section 6, par. 3, Corporation Code of the
Philippine).
SHARE PREMIUM- (or Additional Paid-in Capital). It is
the portion of the paid-in capital representing amounts
paid by shareholders in excess of par. It may also result
from transactions involving treasury stocks, retirement
of shares, donated capital, share dividends and any
other “gain” on the corporation’s own stock
transactions.
Two Basic Types of Shares
Ordinary Share- This share represents the basic
ownership class of the corporation. When only one class
of share is issued, it must be ordinary share. Ordinary
shares are the entity’s residual equity.
Preference Share- This share gives its owners certain
advantages over ordinary shareholders. These special
benefits relate either to the receipt of dividends when
declared before the ordinary shareholders (preferred as
to dividends) or to priority claims on assets in the event
of corporate liquidation (preferred as to assets).
Terms Related to Share Capital
Authorized Share Capital
-The number of authorized shares indicates the
maximum number of shares the corporation can issue
as specified in the article of incorporation.
-This maximum number of shares when multiplied by
the par value of the share will yield the authorized
share capital.
-Note that any increase or decrease in the authorized
share capital requires prior approval of the SEC and
formal amendment to the articles of incorporation
Issued Share Capital
-These are shares which have been sold and paid for in
full.
-Issued shares may include treasury shares.
-Share Capital, either Ordinary Shares account or
Preference Shares account, is credited for the total par
value of fully collected subscriptions or in the case of
no-par value shares, for the total consideration received
in relation to the issue.
-Share Capital is debited only when the issued shares
are retired, redeemed or canceled by the corporation.
Subscribed Share Capital
-It is the portion of the authorized share capital that has
been subscribed but not yet fully paid.
-This shareholders’ equity account is credited for the
total par value of the shares subscribed and debited for
the total par value the fully of collected subscriptions.
Outstanding Share Capital
-These are issued shares, which are in the hands of the
shareholders.
-The number of outstanding shares will equal the
difference between the issued shares and the treasury
shares.
Treasury Stock
-These are issued shares acquired by the corporation
but not retired and are therefore, awaiting to be
reissued at a later date.
ACCOUNTING PROCEDURE
ISSUANCE OF SHARE CAPITAL
WITH PAR- When shares with par value are sold, the
proceeds should be credited to the share capital
account to the extent of the par value of the shares,
with any excess being reflected as share premium.
WITHOUT PAR- When shares without par value are
sold, the proceeds should be credited to the share
capital account.
-If the no-par stock has a stated value, the excess
proceeds over stated value may alternatively be
credited to share premium.
Considerations for Issuance of Shares
SHARE CAPITAL
-Actual cash paid to the corporation
-Tangible or intangible properties actually received by
the corporation
-Labor already performed for or services actually
rendered to the corporation
-Previously incurred indebtedness by the corporation
Actual cash paid to the corporation
-Most share issues are for cash since the primary
reason for issuing shares is to raise capital for a
corporation’s operating activities. The entries to record
the issuance of shares for cash will depend on whether
the share is with or without par value.
SUBSCRIPTION OF SHARES
The subscription contract is a legally binding contract
which provides for
-the number of shares subscribed
-the subscription price
-the terms of payment and
-other conditions of the transaction
A subscriber becomes a shareholder upon subscription
but the stock certificates evidencing ownership over
shares of stock are not issued until the full collection of
the subscription. -Set up Receivable Account
“Subscription Receivable
Subscription Receivable
Shareholders’ equity account
-Presented in the statement of financial position as a
deduction from the related Ordinary Shares.
Subscribed Ordinary Shares 50,000.00
Less: Subscription Receivable -
50,000.00
Current Asset Account
-When it is collectible within one year
Subscriber Fails to Settle
-Declared delinquent
-Public auction (these shares will be sold to the person
who is willing to pay the “offer price” which includes the
full amount of the subscription balance plus accrued
interest, cost of advertisement and expenses of auction
sale in exchange for the smallest number of shares.
-Highest bidder
PUBLIC AUCTION
NO BIDDER
-The corporation may bid for the delinquent shares and
the total amount due shall be credited as paid in full in
the books of the corporation. These shares shall be
considered as TREASURY SHARES.
SHARE CAPITAL
NON CASH CONSIDERATIONS
assets
Measurement:
1. Fair Value of goods/ assets received
2. Fair Value of EQUITY INSTRUMENTS.
Services
Measurement:
1. Fair Value SERVICES received.
2. Fair Value of EQUITY INSTRUMENTS.
Outstanding Liability
Measurement:
1. Amount of Liability set off
2 methods of accounting for share capital
1.journal entry method
2. memorandum method
-The difference between the two lies in the entries
pertaining to authorization and issuance of share
capital.
AUTHORIZATION
SHARES SUBSCRIPTION
COLLECTION
ISSUANCE OF STOCK
CASH SUBSCRIPTION AT PAR
TREASURY STOCK
-are shares of stock which have been issued and fully
paid for, but subsequently reacquired by the issuing
corporation either by purchase, redemption, donation
or through other lawful means.
-Such shares may again be disposed of for a reasonable
price fixed by the board of directors.
Section 41 of Corporation Code provides that a stock
corporation has the power to purchase its own shares
for a legitimate purpose provided it has unrestricted
retained earnings. Some of the reasons for the purchase
of treasury stock are as follows:
(1) to support employee stock compensation plans;
(2) to improve the stock market price by decreasing
the supply of shares;
(3) to avoid takeover by an outside party.
-Paragraph 33 of International Accounting Standards
(IAS) No. 32, Financial Instruments: Presentation, states
that, if an entity reacquires its own equity instrument,
these instruments, (‘treasury shares’) shall be deducted
from equity.
-No gain or loss shall be recognized in profit or loss on
the purchase, sale, issue or cancellation of an entity’s
own equity instrument.
-Treasury stock is not an asset because the corporation
may not own shares of itself. To reiterate, it is reported
as a deduction from the total shareholders’ equity.
PURCHASE OF TREASURY STOCK
par or stated value method
-treasury stock is debited for an amount equal to the
par stated value of the stock reacquired
cost method
-is the preferred method of accounting for treasury
stocks by the Accounting Standards Council as stated in
SFAS No. 18 , par . 6.
Cost method
-treasury stock is recorded at cost regardless of whether
the share is acquired below or above par or stated
value.
-If treasury stock is purchased for cash, the cost is equal
to the cash payment.
-If the treasury stock is acquired for non-cash
consideration, the cost is usually measured by the
recorded amount of the non-cash assets surrendered
given in exchange.
-The purchase of treasury shares does not decrease the
number of shares issued; only the outstanding shares
decrease.
-The effect of the purchase is to decrease both total
assets and total shareholders’ equity.
-Treasury stocks transactions may affect cash flows but
they have no effect on the profit of the corporation.
RETIREMENT OF TREASURY STOCK
-The shares purchased may be subsequently retired
-The Ordinary Shares account is reduced by its par
value.
-The number of shares issued is reduced by the stock
retired.
-The treasury stock account is credited at cost.
Retirement may result is a “gain” or “loss” (note IAS 32,
par. 33).
Donated Capital
-Contributions, including shares of the corporation,
received from shareholders should be recorded at the
fair market value of the items received, with the credit
going to share premium . If significant, such
contributions may be designated as donated capital
(SFAS No. 18, par.28).
-If the donation is in the form of shares of the
corporation , the account share premium or donated
capital is credited at the time the shares are reissued.