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Shareholders Equity Also known as stockholders equity is the residual interest of owners in the net assets of a corporation measured

d by the excess of assets over liabilities. Thus, giving us the equation:

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 of a Corporation Artificial Being. Law assumes it as a person so that it can practically perform all business functions which natural person can do. It has a separate and distinct personality from its stockholders, officers and employees. Created by operation of Law. Corporation cannot come into existence by mere agreement of the parties; likewise, corporation can only be allowed to exist for lawful purposes. Power of Succession. Shares of stock which is an evidence of ownership in a corporation can be transferred from one person to another. However, corporations existence should not exceed 50 years from the date of incorporation, unless extended. Powers, attributes and properties. Corporation can only exercise powers that it is expressly authorized to perform in accordance with the Corporation Code, its Articles, By-Laws, and other special laws.
Advantages 1. Limited liability of stockholders. 2. Transferability of shares. 3. Continued life existence. 4. Greater source of funds. 5. Centralized management. Disadvantages 1. Complicated in formation and operation. 2. Greater degree of government control and supervision. 3. Centralized managemnt. 4. Weakened credit standing. 5. Heavier income tax.

Kinds of Corporation Stock Corporations Corporation issue shares of stock to the stockholders, who are entitled to receive dividends representing their earnings from the corporation. Non- Stock Corporations Corporation does not issue shares of stock since they are created for civic, charitable or religious purposes. Accounting for Capital Transactions Major Classification of Capital Stocks Common Stock. Represent basic interest of ownership in a corporation. Owners of this shares are called common stockholders because they receive the same privilege and rights. Moreover, they assume greater risk but generally exercise general control and receive greater reward in the form of dividends. Preferred Stock. A separate class of corporate stock which accorded by the corporate by-laws a preference with respect to dividends and/ or assets over common stock. The capital stock subsection of stockholders equity consists of the following elements: Capital Stock. Amount fixed in the articles of incorporation to be subscribed and paid in or secured to be paid in by the shareholders of the corporation. Subscribed capital stock. Portion of the authorized capital stock that has been subscribed but not yet fully paid and therefore still unissued. Subscription receivable. Unpaid portion of the subscribed capital stock. This is treated as deduction from the subscribed capital stock, except when collectible within a year, wherein it is classified as current asset. Accounting Methods for Capital Stock

COMPARISON MEMORANDUM ENTRY AND JOURNAL ENTRY METHODS Memorandum Entry Journal Entry Method xxx xxx xxx xxx xxx xxx xxx xxx xxx

Authorization Memo Entry (in general ledger) Unissued capital stock Autorized capital stock Subscription Subscription receivable xxx Subscription receivable Subscribed capital stock xxx Subscribed capital stock Issuance Subscribed capital stock xxx Subscribed capital stock Capital stock xxx Unissued capital stock Reacquisition Treasury stock xxx Treasury stock Appropriate account xxx Appropriate account Retirement of treasury stock Capital stock xxx Capital stock

Values for Capital Stock Issuance In general, the capital may be issued at: Par value. Nominal peso amount assigned to each share of stocks (or bonds) by the companys charter. It is the face value of the stocks (or bonds) appearing on the certificate. Stated value. If the corporations charter contains no par value stock, its board of directors (in the absence of the stockholders) can arbitrarily select an amount for its stock when issued. Market value. Amount that a share of stock is bought or sold in the open market. It is usually issued above par or stated value. The excess of market value over par or stated value should be credited to the additional paid-in capital account. Treasury Stocks Corporate shares of stock repurchased and held by the corporation itself. Reasons for buyback: Reissue to employees for compensation. Hold in treasury (or retire) to increase market price and earnings per share. Reduce total dividend payouts while maintaining per share payouts. Thwart takeover attempts by reducing proportion of shares available for purchase.

Give cash back to existing shareholders. The debit balance account called Treasury Stock is reported in stockholders equity as a contra (reduces SE). Note: not an asset. The stock remains issued, but is no longer outstanding. Does not have voting rights and cannot receive cash dividends. May be reissued (to the market or to employees) or retired. No gains or losses are ever recognized from these equity transactions. Accounting for Retained Earnings and Dividends Retained Earnings Real or balance sheet account representing the accumulated income or losses of the corporation since its inception. Thus, it represents accumulation of net earnings reduced by net losses and dividends declared. Also, it is used to effect adjustments on equity due to changes in accounting policies and prior period error.
Retained Earnings DEBIT 1.) Closing of income summary with debit balance. 2.) Appropriation for specific purposes. 3.) Declaration of dividends. CREDIT 4.) Clossing of income summary with credit balance.



Kinds of Retained Earnings Unappropriated Retained Earnings. Portion of retained earnings which is available for dividends distributions to the stockholders either in form of cash, property or stocks. Appropriated Retained Earnings. This is not available for any dividend declaration because it is restricted for a specific purpose which the board of directors deemed necessary. Reasons for advanced for the appropriation of retained earnings: Statutory or legal restrictions. These are created based on the requirements of the law or the statute under which the company is incorporated. Example for this is appropriation for treasury stock. Contractual restriction. Previous contracts related to bond indentures frequently contain a requirement that retained earnings in specified amounts to be appropriated each year during the life of bonds. Example is appropriation for bonds retirement and for sinking fund. Existence of possible or expected loss. Reserve for estimated losses due to unfavorable contractual obligations, lawsuits or by way of other general contingencies.

Protection of financial position. It maintains the company strong financial position. Best example is appropriation for plant expansion. Statement of Retained Earnings Financial report that shows the changes directly affecting the retained earnings of a corporation. Prior period errors. Includes inaccuracies resulting for mathematical error, mistakes in accounting application of oversight of facts that are known to accountant at the time of financial statement are prepared. Effect of change in accounting policies. Adjustments when the company shifts from one accounting principles to another. Net income or net loss for the period. Net income is added while net loss decreases the balance of retained earnings. Dividends to stockholders. Usually reduced the same upon dividends declaration. Current period appropriation. Reduce the retained earnings due to appropriation made by boards or requirement by law. Dividends Part of unappropriated retained earnings distributed I in the form of cash or non-cash assets of the corporation to its stockholders as a return on capital. Category of Dividends Return of capital. Liquidating dividends paid through use of capital invested by the owners. Return on capital. Most common purpose of distributing dividends. Forms of Dividends Cash Dividends. Dividends payable in cash. It is equal to cash declaration. Property Dividends. Dividend is payable in form of asset other than cash. Amount to be debited is equal to the book value of the assets. Stock Dividends. Shares to be issued as stock dividend are small (less than 20%) retained earnings is to be debited at market value of the shares issued., while if it is more that 20% retained earnings is to be debited at par.


Cash Dividend?


Retained Earnings at cash value xx Cash dividends payable xx Cash Dividends payable Cash xx xx

No Retained Earnings at valued property Property dividends payable Property Dividend? Yes Property Dividends payable Property xx xx xx xx

Retained Earnings at MV of shares Stock distributable Less than 20% Stock Dividend More than 20% Stock Distributable Capital Stock

xx xx xx xx

Retained Earnings at PV of shares Stock distributable Stock Distributable Capital Stock

xx xx xx xx


Earnings per shares Amount of earnings attributable to each share of common stock, it is income during the year assigned to each outstanding share of a corporation. It is used to indicate the attractiveness of common stocks as a n investment. Also, shows efficiency of the business to maximize resources in terms of generating income. Types of Earnings per Share Basic Earnings per Share. Refers to fundamental computation of income assigned to each share of common stock without consideration to each share of common stock without considering corporate convertible share. Diluted Earnings per Share. Refers to the computation of income assigned to each share of common stock with consideration to the corporate convertible shares.

Basic Earnings per Share =

Net Income after tax

Average outstanding common stock

Two Classes of Stock Net income after tax should be reduced by dividends on preferred stock. In case if the preferred stock is cumulative, regardless whether there is declaration or not, only preferred dividends for the current period are allowed to be deducted from the income. On the other hand, if the preferred stock is non-cumulative, deduct preferred dividends only of there is declaration. Book Value per Share Portion of stockholders equity assigned to each common shares of stock outstanding.

Book Value per Share = Total Stockholders Equity Number of outstanding capital stock