Accounting 2 MATERIALS

(CORPORATION)

CORPORATION
DEFINITION UNDER CORPORATE CODE
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
incidence to its existence.
ATTRIBUTES OF A CORPORATION
A. ARTIFICIAL BEING it has a personality separate and distinct from that of a
stockholder.
B. CREATED BY OPERATION OF LAW- it is created and organized under a general
law and is considered a legal body with rights and powers.
C. HAS THE RIGHT OF SUCCESSION- it shall continue to exist for the period stated
in the Articles of Incorporation, and the death of any stockholder or director shall
not dissolve the corporation.
D. Has the powers, attributes and properties expressly authorized by law or
incident to its existence. it should be noted that if the corporation exercises
powers not within its express, inherent or implied powers, it commits an ultra vires
act which is a ground of dissolution.
CHARACTERISTICS OF A CORPORATION
1. SEPARATE LEGAL ENTITY it may acquire, own, and dispose property in its
corporate name. It may also incur liabilities and enter into other types of contracts
according to the provisions of its charter.
2. CONTINUOUS LIFE- it has a continuous life regardless of changes in the
ownership of stock. Sales or transfer of stocks by stockholders does not affect the
continuity of the corporation.
3. TRANSFERABILITY OF OWNERSHIP-stockholders may transfer their stocks as
they wish. They may sell or trade the stock, give it away, bequeath it in a will, or
dispose of it in any way they desire.
4. NO MUTUAL AGENCY stockholder of a corporation cannot commit the
corporation to a contract (unless he or she is also an officer of the business).
5. SEPARATION OF OWNERSHIP AND MANAGEMENT stockholders own the
business, but the board of directors elected by the stockholders appoints officers
to manage the business.
6. LIMITED LIABILITY a stockholder has limited liability to the extent of his/her
subscription and paid investment in the corporation.
7. CORPORATE TAXATION corporations are separate taxable entities and pay a
variety of taxes not borne by proprietorships or partnerships.
8. GOVERNMENT REGULATION strong government regulation is an important
disadvantage to the corporation.
ADVANTAGES OF A CORPORATION
1. Capacity to act as a legal entity.
2. Continuity of life.
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3. Liability of stockholders is limited to their paid investment.

4. Better management because of bigger membership.
5. Unified control given to the Board of Directors.
6. Ease of transferability of shares.
7. Greater source of capital.
DISADVANTAGES OF A CORPORATION
1. Subject to greater government control.
2. Frequent and varied reports are required of a corporation.
3. Cannot engage in business outside its charter.
4. Minority stockholders are at the mercy of majority of stockholders.
5. Subject to higher taxation than other form of business organization.
6. Greater possibility of abuse of power by the board of directors.
7. Higher cost of organization and operations.
ORGANIZATION OF A PRIVATE CORPORATION
Creation of a corporation begins when its organizers, called Incorporators, who shall draft
the Articles of Incorporation duly signed and acknowledged by all the incorporators.
The Articles of Incorporation is then filed with other required documents to the Securities
and Exchange Commission (SEC) and pays the incorporation fees. The corporation is
legally formed when the Corporate Charter of Certificate of Incorporation is issued by
SEC.
The incorporators have to adopt a set of By-laws within one month from the issuance of
the certificate of incorporation which act as the constitution for governing the
corporation.
The corporate charter is the basic legal document of the corporation; the by-laws must
not contradict or violate the charter. At all times the directors and officers must carry
out their duties in accordance with the charter and the by-laws.
STEPS IN THE CREATION OF A CORPORATION:
1. PROMOTION bringing together persons who interested in the formation of the
corporation as incorporators. It also includes procuring subscriptions of its capital
stock, making arrangement to finance the enterprise, and preparation of
incorporation contracts.
2. INCORPORATION this is the process of filing the Articles of Incorporation, pay
the required fees and file the other required documents to the Securities and
Exchange Commission.
3. ORGANIZATION AND COMMENCEMENT OF BUSINESS OPERATIONS this
includes adoption of By-laws within one month from the issuance of the certificate
of incorporation, election of the Board of Directors and officers of the corporation
stated in the by-laws.
KEY TERMS TO REMEMBER:
ARTICLES OF INCORPORATION a document submitted to the Securities and
Exchange Commission by persons wishing to form a corporation.
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BY-LAWS a set of rules and regulations adopted to be submitted with the SEC within
one month from the
issuance of the certificate of incorporation which acts as the
constitution for governing the corporation.
CORPORATE CHARTER OR CERTIFICATE OF INCORPORATION is a document
issued by SEC to acknowledge the legal existence of the corporation.
INCORPORATORS persons who organized and apply for incorporation of an
organization.
COST OF ORGANIZATION
ORGANIZATION COSTS are costs such as incorporation fees, attorneys fees,
promotional expense, and the cost of printing stock certificates that must be incurred to
organize a corporation. Such costs are paid only once, but they benefit the corporation
during its entire lifetime. Since organization costs benefit more than one period, they
should not be expensed during the first accounting period. They should be debited as
intangible account called Organization Costs and then amortized over a period of 20
years or less.
CORPORATE BOOKS AND RECORDS:
Corporation use many books and records that are similar to those used by
proprietorships and partnerships. Corporate books and records to be kept are:
1. BOOKS AND RECORDS OF BUSINESS TRANSACTIONS these are the books of
original and final entries that are similar to those used by proprietorships and
partnerships like special journals, general and subsidiary ledgers.
2. Minutes Book the minutes of stockholders meetings and board of directors
meetings are recorded in the corporations minutes book.
3. Subscriptions Record when a corporation is formed, the incorporators and
others who wish to become owners subscribe for a certain number of shares of
stock at a specified price per share. This is where the account for each subscriber
may be kept in a subsidiary or stock payment record.
4. Stock Certificate and Transfer Book the corporation issues stock certificates
to each subscriber who has fully paid for his or her stock. Stock certificates issued
and stockholders who transfer their stock to another are recorded in the stock
certificate and transfer book.
5. Stockholders Ledger this contains an account for each stockholder that
shows the number of shares owned as of a particular date but do not include the
peso amounts.
CAPITAL STOCK:
A corporation issues stock certificates to its owners in exchange for their investment in
the business. The basic unit of capital stock is called a share. There are two classes of
capital stock, Common and Preferred. The charter of incorporation indicates the
maximum amount of shares each class of capital stock that a company can legally issue.
(STOCK CERTIFICATE a document that shows proof of ownership in a corporation.)
AUTHORIZED CAPITAL STOCK is the number of shares of capital stock (common and
preferred) that is stated in the charter that a corporation can sell. Under the corporation
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code at least 25% of the authorized capital stock should be subscribed and at least 25%
of the capital stock subscribed is paid.
OUTSTANDING STOCKS are stocks issued and in the hands of stockholders.
COMMON STOCK it is the most basic form of capital stock. When a corporation has
only one kind of capital stock, it will be common.
PREFERRED STOCK a class of stock that entitle its owners to certain rights and
preferences over common stockholders. Preferred stocks can be:
1. CUMULATIVE PREFERRED STOCK the holders have a right to a certain
dividend every year. If in some years the board does not declare dividends, the
amount payable will accumulate until the earnings justify the payment.
2. NON-CUMULATIVE PREFERRED STOCK the holders have a right to the current
years dividend but there are no holdovers from past years when dividends were
not declared.
3. NON-PARTICIPATING PREFERRED STOCK the holders each year receive a
certain percent on dividends declared and the remainder goes to common stock.
4. PARTICIPATING PREFERRED STOCK the holders each year receive a certain
percent on dividends and also can get a certain percent on the remainder.
STOCK VALUE FOR CAPITAL STOCK
When a corporation is created, it issues a certain number of shares of stock, which are
then sold to the stockholders. Stock can be issued with:
1. Par Value 2. No Par Value with No Stated Value
3. No Par Value with Stated
Value
Par Value an arbitrary value placed on each share at the time of authorization. Par
value of all outstanding stock is the legal capital an amount that a corporation must
retain in the business for protection of creditors.
Stated Value an arbitrary amount assigned to each share of no-par stock by the board
of directors.
STOCKHOLDERS EQUITY the owners equity of a corporation. The two main sources
of stockholders equity are:
1. PAID-IN CAPITAL this is the amount that stockholders have invested in the
business. It is equal to the values of the assets (usually cash) that have been
contributed by the stockholders.
2. RETAINED EARNINGS these are accumulated profits of earnings that are
retained or kept in the corporation.
The paid-in capital contributed by the stockholders is recorded in accounts for each class
of stock and paid-in capital in excess of par. If there is only one class of stock, the
account is entitled common stock or capital stock.
The retained earnings amount resulting from crediting the balance in the income
summary account (the net income) to a retained earnings account at the end of an
accounting period and debiting it for dividends declared.
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DIVIDENDS a distribution of earnings by a corporation to its stockholders in proportion

to the number of shares held. The distribution may be in form of cash, other assets or
the corporations own stock.
ACCOUNTING FOR CAPITAL STOCK TRANSACTIONS
The procedures used to account for a corporations assets, liabilities, revenues and
expenses are generally the same as those used for sole proprietorships and partnerships.
The main difference is in accounting for owners equity.
In accounting for the owners equity or stockholders equity for a corporation, the
earnings are kept separate from the amount invested by the stockholders. Thus, the
stockholder equity is composed of two amounts the equity invested by the
stockholders (paid-in capital) and the equity resulting from profitable operations
(retained earnings).
ACCOUNTING FOR CAPITAL STOCK TRANSACTIONS REQUIRES THE USE OF
SPECIAL ACCOUNTS AS FOLLOWS:
a) Authorized Capital Stock the number of shares authorized multiplied the par
value of shares.
b) Common Stock part of paid-in capital representing the basic ownership equity
of the corporation. If the corporation has only one class of stock, it will be common
stock.
c) Discount on Common Stock- the amount by which the par value of the stock
exceeds the selling price newly issued stock.
d) Issued Capital Stock stock which has been fully paid either by assets or
services, which has been issued and delivered to stockholders.
e) Organization Cost an intangible asset that records the initial cost of forming
the corporation, such as legal fees, incorporation fees and for services due to
promoters.
f) Paid-in Capital in Excess of Par the amount by which the selling price of the
newly issued stock exceeds its par value. This also referred to as additional paid-in
capital or premium on common or preferred stock.
g) Paid-in Capital in Excess of Stated Value the amount by which the selling
price of the newly issued stock exceeds its stated value.
h) Preferred Stock stock that provides stockholders with a prior claim to a
corporations profits and assets over holders of common stock.
i) Subscription Receivable the amount due from subscribers (common or
preferred) whose subscriptions are not fully paid.
j) Subscribed Capital Stock this is the temporary stockholders equity account
for stocks subscribed until fully paid that is recorded at par value.
k) Unissued Capital Stock stocks which has not been issued and delivered to
stockholders. Under the journal entry method, this account is debited based on
the authorized capital stock and credited whenever stocks are fully paid and stock
certificates are issued to stockholders.
RECORDING CAPITAL STOCK TRANSACTIONS: there are two methods of used to
record authorization and issuance of capital stock. These two methods are:

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1. MEMORANDUM ENTRY METHOD under this method, only a memo entry is

made to indicate the number of shares authorized and its par value in the ledger
account of the capital stock.
Ex. Authorized to issue ___ shares of stock at a par value or stated value of P ____
per share.
ISSUANCE OF STOCK CERTIFICATES IS RECORDED WITH THIS JOURNAL
ENTRY:
FOR SHARES SOLD FOR CASH:
A) Cash
xxx
Capital Stock
xxx
FOR SHARES SUBSCRIBED TO AND LATER PAID IN FULL:
B) Subscribed Capital Stock
xxx
Capital Stock
xxx
2. JOURNAL ENTRY METHOD under this method, the entry to record the
authorized capital stock is:
Unissued Capital Stock
Authorized Capital Stock

xxx
xxx

ISSUANCE OF STOCK CERTIFICATES IS RECORDED WITH THIS JOURNAL

ENTRY:
FOR SHARES SOLD FOR CASH:
C) Cash
xxx
Unissued Capital Stock
xxx
FOR SHARES SUBSCRIBED TO AND LATER PAID IN FULL:
D) Subscribed Capital Stock
xxx
Unissued Capital Stock
xxx
Sample Balance Sheet of a Corporation
Most accounting balance sheets classify a company's assets and liabilities into distinctive
groupings such as Current Assets; Property, Plant, and Equipment; Current Liabilities;
etc. These classifications make the balance sheet more useful. The following balance
sheet example is a classified balance sheet.

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