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CORPORATION

ACCOUNTING
Basic Considerations
DEFINITION
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.
BASIC CHARACTERISTICS
1. Artificial being
2. Created by operation of law
3. Right of succession
4. Powers, attributes and properties expressly
authorized by law or incident to its existence
5. Ownership interest comprised of share capital
6. Managed by a board of directors
Artificial Being:
- Not a real person
- Assumed by law as a person
- Separate and distinct from shareholders,
officers and employees

Created by operation of law:
- Cannot exist by mere agreement
- Require a grant by the state
- Can exist only for lawful purposes
Right of succession:
- Share of stock is transferable
- Can continue to exist despite the
circumstances of the stockholders
- 50 years life, renewable, becomes
indefinite

Powers, attributes and properties:
- Can only exercise powers expressly
authorized by the Corporation Code, its
By-laws and other special laws
- Can exercise incidental powers inherently
necessary for its existence and objectives
Ownership interest:
- Represented by share capital divided into
several shares of stock
- Any person buying a share capital
becomes a part owner called stockholder
- Stockholder is liable only to the extent of
his subscription
Managed by a board of directors:
- BOD is the group of stockholders managing
the corporation
- At least 5 natural persons, not exceeding 15
- Only the BOD and other authorized officers
can bind the corporation into contracts

ADVANTAGES OF A
CORPORATION
1. Legal capacity to act as a legal entity
2. Limited liability of stockholders
3. Continued life existence
4. Transferability of shares
5. Centralized management
6. Shareholders are not general agents
7. Greater source of funds
DISADVANTAGES OF A
CORPORATION
1. Complicated in formation and management
2. Greater degree of government control and
supervision
3. High cost of formation and operation
4. Heavier income tax
5. Subservient minority shareholders
6. Management and control separate from
ownership
7. Transferability of shares

CLASSES OF CORPORATION
1. Stock corporations share capital are
divided into shares and are authorized to
distribute to shareholders dividends on
the basis of shares held
2. Non-stock corporations no part of its
income is distributable as dividends
OTHER CLASSES OF
CORPORATION
1. As to number of persons
a. sole corporation
b. aggregate corporation
2. As to nationality
a. domestic corporation
b. foreign corporation
c. multinational corporation

OTHER CLASSES OF
CORPORATION
3. As to purpose
a. government corporation (public,
GOCC)
b. privately owned corporation (civil,
eleemosynary, ecclesiastical)
c. quasi-public corporation

OTHER CLASSES OF
CORPORATION
4. As to legal right
a. de jure corporation
b. de facto corporation
5. As to extent of membership
a. open corporation
b. close corporation


OTHER CLASSES OF
CORPORATION
6. As to relations to other corporations
a. parent or holding corporation
b. subsidiary corporation

COMPONENTS OF A
CORPORATION
1. Incorporators
2. Corporators
3. Shareholders or members
4. Subscribers
5. Promoters
6. Underwriters

Classes of Shares in General
Par Value Shares
No-par Value Shares
Voting Shares
Non-voting Shares
Ordinary Shares
Preference Shares
Promotion Shares
Treasury Shares
Convertible Shares
RIGHTS OF SHAREHOLDERS
1. Right to ownership and transfer of shares
2. Right to vote
3. Right to profit
4. Right to inspect financial statements
5. Right to corporate assets
STAGES IN ORGANIZING A
CORPORATION
1. Promotion
2. Incorporation
3. Formal organization and commencement
of business
PROMOTION INVOLVES:
1. Issuing of prospectus
2. Procuring subscriptions from prospective
investors
3. Securing a corporate charter
PROCESSES OF
INCORPORATION
1. Registration of corporate name with SEC
2. Drafting/execution of Articles of
Incorporation
3. Execution of sworn affidavits and bank
deposit certificate
4. Payment of filing and publication fees
5. Issuance of Certificate of Incorporation
FORMAL ORGANIZATION
Requires adoption of By-laws and election
of BOD/BOT and of officers
Includes taking steps necessary to
transact business and accomplish purpose
FORMAL ORGANIZATION
Shareholders/stockholders are the owners
of the business from which BOD are
elected
BOD members are policy makers and
exercise corporate powers
Procedure
Time to
Complete Associated Costs
Verify and reserve the company name with the Securities and Exchange Commission (SEC)
The company can verify the availability of the company name online. Verification is free but
reservation of the name, once approved by the SEC, costs PHP 40 for the first 30 days. The
company name can be reserved for a maximum of 120 days for a fee of PHP 120, which is
renewable upon expiration of the period. 1 day PHP 40
Deposit paid-up capital in the Authorized Agent Bank (AAB) and obtain bank certificate of
deposit
The company is required by law to deposit paid-up capital amounting to at least 6.25% of the
authorized capital stock of the corporation. This paid-up capital must not be less than PHP 5,000.
Some banks charge a fee for issuance of the certificate of deposit. 1 day No cost
Notarize articles of incorporation and treasurer's affidavit at the notary
According to Sections 14 and 15 of the Corporation Code, articles of incorporation should be
notarized before filing with the SEC. 1 day PHP 500
Register the company with the SEC
The company can register online through SEC i-Register but must pay on site at the SEC. The
following documents are required for SEC registration:
a. Company name verification slip;
b. Articles of incorporation (notarized) and by-laws;
c. Treasurer's affidavit (notarized);
d. Statement of assets and liabilities;
e. Bank certificate of deposit of the paid-in capital;
f. Authority to verify the bank account;
g. Registration data sheet with particulars on directors, officers, stockholders, and so forth;
h. Written undertaking to comply with SEC reporting requirements (notarized); and
i. Written undertaking to change corporate name (notarized).
The SEC Extension Office charges a handling fee of PHP 30 to cover the cost of transmitting the
documents to the SEC Head Office in Metro Manila. 5 days
PHP 2,695 (PHP 1,667.99
filing fee equivalent to 1/5 of
1% of the authorized capital
stock or the subscription price
of the subscribed capital stock,
whichever is higher but not
less than PHP 1,000 + PHP
16.68 legal research fee (LRF)
equivalent to 1% of filing fee
but not less than PHP 10 +
PHP 500 By-laws + PHP 150
for registration of stock and
transfer book (STB) required
for new corporations + PHP
320 STB + PHP 10 registration
for SEC bulletin + PHP 30
handling fee)
CORPORATE OFFICERS
1. President must be a director
2. Vice-President
3. Secretary
4. Treasurer

Org Chart
COMMENCEMENT OF BUSINESS
Should be within 2 years from
incorporation, failure to do so means
dissolution and stopping of corporate
powers
If commenced and then inoperative for at
least 5 years, the same is a ground for
suspension/revocation of certificate of
incorporation
ARTICLES OF INCORPORATION
Basic instrument by which a corporation is
formed under the corporation law,
executed by several persons as
incorporators and filed in a designated
public office such as the SEC as evidence
of corporate existence.
Contents are provided in Sec. 14 of the
Corporation Code
PRE-INCORPORATION
SUBSCRIPTION REQUIREMENT
1. Sworn statement of the Treasurer of the
25% subscription of authorized capital
stock
2. At least 25% of subscription has been
fully paid, which should not be less than
P5,000
CORPORATE BY-LAWS
Are regulations, ordinances, rules or laws
adopted by the corporation for its
government.
Contents are found in Sec. 47 of the
Corporation Code
Pro-forma AI and BL
BOOKS AND RECORDS
Sec. 74 of the Corporation Code provides that
stock or non-stock corporation should keep in
its principal office the following:
1. Minutes book
2. Stock and transfer book
3. Books of accounts
4. Subscription book
5. Shareholders ledger
6. Subscribers ledger
7. Share certificate book
FORMS OF BUSINESS
Corporation Partnership
Sole
Proprietorship
Owners
At least 5
2 or more Only 1
Ownership
account
Share capital
Partners
capital
Owners
capital
Equity section
of B/S
Shareholders
equity
Partners
capital
Owners
capital
I/S closed to
Accumulated
P/L (R/E)
Partners
capital
Owners
capital
CORPORATION
ACCOUNTING
Share Capital
SHAREHOLDERS EQUITY
Residual interest of the shareholders in
the assets of the corporation after
deducting liabilities
Formula:
Total assets XXX
Less: Total liabilities XXX
Shareholders equity XXX
ELEMENTS OF SHAREHOLDERS
EQUITY
3 Subsections:
1. Total share capital
2. Other reserves
3. Accumulated profits/losses (Retained
earnings)
A. TOTAL SHARE CAPITAL (Total
Capital Stock)
1. Share capital (Capital stock)
2. Subscribed share capital
3. Subscriptions receivable (deduction from
Subscribed share capital or part of
current assets if due within 1 year)
4. Treasury shares (deduction from total
Shareholders equity)
B. OTHER RESERVES
1. Appropriation reserve (R/E appropriated)
2. Additional paid-in capital (APIC)
a. Share premium (APIC in excess of par/stated value;
APIC on treasury shares)
b. donated capital
c. equity share options issued
3. Revaluation surplus (revaluation increment)
4. Unrealized gains/losses on available for sale securities
5. Foreign currency translation differences
C. ACCUMULATED PROFITS

Retained earnings unappropriated
SHARE CAPITAL (Capital Stock)
Elements:
1. Share capital paid-in capital representing
amount of total par or stated value of shares
issued
- represents portion of authorized share capital
that has been fully paid
- may be par value share or no par value share
but with stated value
SHARE CAPITAL (Capital Stock)
Par value
- Refers to a nominal peso amount assigned to
each equity share by the companys charter.
- Face value of the shares appearing on the
certificate.
- The fixed amount assigned to each equity share.
- In the Philippines, it is prohibited to issue shares
of stock at an amount below par value.
SHARE CAPITAL (Capital Stock)
Stated value
- BOD can arbitrarily select an amount for its
stock in the absence of par value in the charter
- Serves same purpose as par value, although not
printed in the share certificate.
- Issued price may vary from time to time, fixed
based on shares book value, but cannot be
issued below P5 per share
- Primary advantage: can be issued at any price
without a discount liability.

SHARE CAPITAL (Capital Stock)
2. Subscribed share capital
- Portion of share capital that an investor
agreed to purchase.
- Not yet issued because may only be
partially paid
- added to share capital
SHARE CAPITAL (Capital Stock)
3. Subscriptions receivable
- refers to unpaid portion of SSC
- usually treated as deduction from SSC
except when collectible within 1 year
which may be classified as part of current
asset
SHARE CAPITAL (Capital Stock)
4. Treasury share
- Issued shares reacquired by the issuing
corporation
- Treated as a reduction from total
shareholders equity
NATURE OF SHARE CAPITAL
The capital or principal fund of a corporation
from the contribution of subscribers or sale of
corporate-owned shares.
Shareholders ownership interest
Owning at least 1 share makes one a
shareholder or part owner
Corporation can issue upon SEC registration
Can be ordinary shares (common stock) and
preference shares (preferred stock)
MAJOR CLASSIFICATIONS OF
SHARE CAPITAL
1. Ordinary share (common stock)
- basic interest of ownership
- if there is only 1 class of stock issued
- holders receive same privilege and rights,
assume greater risks but with greater control
and may be greater reward in dividends and
capital appreciation, have voting rights and can
be voted as part of BOD
MAJOR CLASSIFICATIONS OF
SHARE CAPITAL
2. Preference share (preferred stock)
- separate class according to the corporate by-laws with
preference to dividends and/or assets over ordinary
shares
- have fixed dividend percentage based on par value
- according to law, may be issued only with a stated par
value
- holders have no voting rights and cannot be voted upon
as part of BOD
- cannot be issued alone without ordinary share although
ordinary share can be issued without preference share
CLASSIFICATION OF
PREFERENCE SHARE CAPITAL
1. Cumulative preference shares
2. Noncumulative preference shares
3. Participating preference shares
4. Nonparticipating preference shares
5. Convertible preference shares
6. Redeemable or callable preference
shares
CLASSIFICATION OF
PREFERENCE SHARE CAPITAL
1. Cumulative preference shares
- the right of preferred shareholders to
receive dividend in arrears (undeclared
dividends in previous years) is given
priority before paying common
shareholders
CLASSIFICATION OF
PREFERENCE SHARE CAPITAL
2. Non-cumulative preference shares
- the right of preferred shareholders to
receive dividend in arrears is lost and he
is entitled to receive only the current
years declared dividend
CLASSIFICATION OF
PREFERENCE SHARE CAPITAL
3. Participating preference shares
- the right of preferred shareholders to
receive additional dividend after the
dividend for both ordinary and preferred
shares are paid
CLASSIFICATION OF
PREFERENCE SHARE CAPITAL
4. Non-participating preference shares
- the preferred shareholders are not
entitled to receive additional dividend,
only the dividends declared during the
current year, while excess dividends are
all distributed to ordinary shareholders
CLASSIFICATION OF
PREFERENCE SHARE CAPITAL
5. Convertible preference shares
- the preferred shareholders are given
the option to convert their shares into
ordinary shares or some other securities
of the investee corporation
CLASSIFICATION OF
PREFERENCE SHARE CAPITAL
6. Redeemable or Callable preference
shares
- the issued preference shares can be
bought back by the issuing corporation
with a specific call or redemption price
OTHER CLASSIFICATIONS OF
SHARE CAPITAL
Ordinary or preference shares can be classified
according to the purpose for which they are
issued or acquired:
1. Founders stock
2. Bonus Stock
3. Treasury Share
4. Promotion Stock
5. Donated Stock
6. Convertible Stock
7. Watered Stock
OTHER SHARE CAPITAL
CLASSIFICATIONS
Ordinary or preference shares can be
classified according to the purpose for
which they are issued or acquired:
1. Founders stock equity share given to
incorporators with certain privileges on
dividends and voting rights not enjoyed by
ordinary incorporators (subject to SEC
approval and 5-year limitation of exercise)
OTHER SHARE CAPITAL
CLASSIFICATIONS
2. Bonus stock (Stock warrant) equity
share given as a premium to encourage
sale of another class of securities (like
bonds)
3. Treasury stock equity share that has
been issued to shareholders as fully paid
and subsequently reacquired by the
corporation
OTHER SHARE CAPITAL
CLASSIFICATIONS
4. Promotion stock equity share usually
issued as incentive or payment to those
who take the preliminary steps in
organizing the corporation
5. Donated stock securities given to a
corporation by its own shareholders
commonly for resale
OTHER SHARE CAPITAL
CLASSIFICATIONS
6. Convertible stock a preference share which
may be exchanged for ordinary share or another
security, usually of the same company, in
accordance with the terms of the issue
7. Watered stock an equity share that is issued
by a corporation as fully-paid up share capital,
when in fact the whole amount of the par value
thereof has not been paid, as a result of
overstatement of the value of consideration
received
ACCOUNTING FOR SHARE
CAPITAL TRANSACTIONS
1. Authorization involves recording of capital
share upon approval by the SEC
2. Subscription involves accounting for share
capital assigned to potential shareholders who
agreed to pay a consideration in the future
3. Issuance involves accounting for share capital
upon full payment of subscribed capital shares
4. Reacquisition involves accounting for
acquisition and retention of corporations own
equity shares previously issued
5. Retirement involves accounting for acquisition
and retirement of the corporations own share
capital
MEMORANDUM METHOD
Journal Entries:
1. Authorization
(memo entry in the general ledger only)
2. Subscriptions
Subscription receivable XXX
Subscribed share capital XXX


MEMORANDUM METHOD
3. Issuance of share certificate
Subscribed share capital XXX
Share capital XXX
4. Reacquisition
Treasury share XXX
Cash XXX
5. Retirement of treasury share
Share capital XXX
Treasury share XXX


JOURNAL ENTRY METHOD
Journal Entries:
1. Authorization
Unissued share capital XXX
Authorized share capital XXX
2. Subscriptions
Subscription receivable XXX
Subscribed share capital XXX


MEMORANDUM METHOD
JOURNAL ENTRIES
3. Issuance of share certificate
Subscribed share capital XXX
Unissued share capital XXX
4. Reacquisition
Treasury share XXX
Cash XXX
5. Retirement of treasury share
Share capital XXX
Treasury share XXX


AUTHORIZATION OF SHARE
CAPITAL
The maximum authorized number of
shares multiplied by the par value per
share is called authorized share capital.
A decrease or increase in ASC requires
amendment of AOI and SEC approval.
AUTHORIZATION OF SHARE
CAPITAL
Example:
Assume that Big Dreams Corporation was
authorized to issue 10,000 ordinary shares at
par value of P100 per share.
Journal Entry Method:
Unissued Ordinary Shares P1,000,000
Authorized Ordinary Shares P1,000,000

Memorandum Method:
Memo entry: The company was authorized to issue P1,000,000
ordinary shares, divided into 10,000 shares, with P100 par value.
SHARE SUBSCRIPTIONS
Share subscription a written contract by
which one engages to take and pay for the
share capital of a corporation at some
future date.
- Once perfected, subscriber becomes
bound to buy the shares.
SHARE SUBSCRIPTIONS
Example:
Assume that the incorporators of Big Dreams Corporation
subscribed to the 25% of authorized share capital of
P1,000,000 at par value of P100 per share and paid the
25% of the subscribed share capital.

To record the subscription:
Subscriptions receivable 250,000
Subscribed ordinary shares 250,000

To record the cash collection:
Cash 62,500
Subscriptions receivable 62,500

ISSUANCE OF SHARE CAPITAL
FOR CASH RECEIVED
Example:
Based on the preceding example, assume that 80% of the
P250,000 total subscribed share capital is fully paid.

Cash 137,500
Subscriptions receivable 137,500

Journal Entry Method:
Subscribed ordinary share 200,000
Unissued Ordinary share 200,000
Memorandum Method:
Subscribed ordinary share 200,000
Ordinary share 200,000
ISSUANCE OF SHARE CAPITAL
FOR CASH RECEIVED
Assume that additional 500 ordinary shares
are issued for cash of P120 per share
(above par):

Cash 60,000
Ordinary Shares 50,000
Share premium 10,000