ACCOUNTING FOR CORPORATIONS CLASSES OF CORPORATION

A corporation is an artificial being created by operation

by law, having the right of succession and the powers, Stock corporation- Corporations which have share
attributes and properties expressly authorized by law or capital divided into shares and are authorized to
incident to its existence (The Corporation Code of the distribute to the holders of such shares dividends or
Philippines, Sec. 2). allotments of the surplus profits on the basis of the
shares held.
Attributes of a Corporation
Non-stock corporation
ARTIFICIAL BEING- A corporation is an artificial being -A non-stock corporation is one where no part of its
with a personality separate and apart from its individual income is distributable as dividends to its members,
shareholders or members. trustees or officers.
CREATED BY OPERATION OF LAW -Any profit that a non-stock corporation may obtain as
-It cannot come into existence by mere agreement of an incident to its operation may obtain as an incident to
the parties as in the case of business partnerships. its operation shall, whenever necessary or proper, be
-Corporations require special authority or grant the used for the furtherance of the purpose or purposes for
State, either by a special incorporation law that directly which the corporation was organized (The Corporation
creates the corporation or by means of a general Code of the Philippines, Sec.87).
corporation law.
RIGHT OF SUCCESSION
Non-stock corporations may be formed or organized for
-A corporation has the capacity of continued existence
charitable, religious, educational, professional, cultural,
subject to the period stated in the Articles of
Incorporation. recreational, fraternal, literary, scientific, social, civic
- The death, withdrawal, insolvency or incapacity of the service , or similar purposes (Sec. 88).
individual shareholders or members will not dissolve
the corporation. Other Classifications
- The transfer of ownership of shares of stock does not
dissolve the corporation. According to number of persons:
1. Corporation aggregate. A corporation consisting of
It has the powers, attributes and properties expressly more than one corporator.
authorized by law or incident to its existence 2. Corporation sole or a special form of corporation
usually associated with the clergy. It is a corporation
Advantages of a Corporation which consists of only one member or corporator and
1. The corporation has the legal capacity to act as a his successors such as bishop.
legal entity.
2. Shareholders have limited liability According to nationality:
3. It has continuity of existence. 1. Domestic corporation. A corporation organized
4. Shares of stock can be transferred without the under Philippines laws.
consent of the other shareholders. 2. Foreign corporation. A corporation organized under
5. Its management is centralized in the board of foreign laws.
directors.
6.Shareholders are not general agents of the business. According to whether for public or private purpose:
Greater ability to acquire funds. 1. Public corporation. A corporation formed or
organized for the government of a portion of the state
Disadvantages of a Corporation (e.g., provinces, cities, municipalities and barangays).
-A corporation is relatively complicated in formation 2. Private corporation. A corporation created for
and management. private aim, benefit or purpose.
-There is a greater degree of government control and
supervision. According to whether for charitable purpose or not:
-It requires a relatively high cost of formation and 1. Ecclesiastical corporation. Those organized for
operation. religious purposes.
-It is subject to heavier taxation than other forms of 2. Eleemosynary corporation. Those established for
business organizations. public charity.
-Minority shareholders are subservient to the wishes of 3. Civil corporation. Those established for business or
the majority. profit.
-In large corporations, management and control have
been separated from ownership. According to their legal right to corporate existence:
-Transferability of shares permits the uniting of 1. De jure corporation. A corporation existing in fact
incompatible and conflicting elements in one venture. 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 Date of Incorporation- 2 years
to share ownership: Section 22 of the Corporation Code states that if a
1. Close corporation. A corporation whose share corporation does not formally organize and
ownership is limited to selected persons or members of commence the transaction of its business within two
a family not exceeding 20 persons. (2) years from the date of its incorporation, its
2. Open corporation. A corporation where the share is corporate powers shall cease and the corporation shall
available for subscription or purchase by any person. be deemed dissolved.
However, if a corporation has commenced business but
According to their relation to another corporation: subsequently becomes continuously inoperative for a
1. Parent or holding corporation. A corporation that is period of at least five (5) years, the same shall be a
related to another corporation that it has the power to ground for the suspension or revocation of its
either directly or indirectly elect the majority of the certificate of incorporation.
directors of a subsidiary corporation.
2. Subsidiary corporation. A corporation controlled by Date of Commencement- 5 years
another corporation known as a parent corporation. However, if a corporation has commenced business but
subsequently becomes continuously inoperative for a
STEPS IN THE CREATION OF A CORPORATION period of at least five (5) years, the same shall be a
ground for the suspension or revocation of its
1. PROMOTION - It is the process of bringing together
certificate of incorporation.
the incorporators or the persons interested in the
business, of procuring subscriptions or capital for the
Articles of Incorporation
corporation and of setting in motion the machinery that
In the Philippines, the general law which governs the
leads to the incorporation of the corporation itself.
creation of private corporations is the Corporation Code
2. INCORPORATION. This step includes the following of the Philippines. Section 14 provides that all
corporations organized under this Code shall file with
a. Verification from the records of the Securities and the Securities and Exchange Commission articles of
Exchange Commission (SEC) that the proposed incorporation in any of the official languages duly
corporate name is not the same or similar to an signed and acknowledged by all of the incorporators,
existing corporation. containing substantially the following matters except as
b. Drafting and execution of the articles of otherwise prescribed by this Code or by special law;
incorporation by the incorporators. The persons elected 1. The name of the corporation;
as temporary treasurer should execute an affidavit 2. The specific purpose or purposes for which the
regarding the share capital subscribed and paid up. The corporation is formed;
treasurer should also submit a sworn statement of 3. The principal place of business which must be
assets and liabilities of the corporation. within the Philippines;
4. The term of existence;
c. Deposit by the treasurer of the cash paid for the 5. The names, nationalities and residences of the
shares subscribed in the bank in the name of the incorporators;
treasurer in trust for and to the credit of the 6. The number of directors or trustees, which shall not
corporation. The bank is required to issue a certificate be less than five (5) nor more than fifteen (15);
of deposit. 7. The names, nationalities and residence of the
d. Filing of the articles of incorporation with the SEC persons who shall act as directors or trustees until
together with treasurer’s affidavit, statement of the first regular directors or trustees are elected
financial position, certificate of bank deposit, and and qualified.
certificate as to the name of the corporation; 8. If it be a stock corporation:
a. Amount of authorized share capital in pesos,
e. Payment of the filing and publication fees; and b. Number of shares into which it is divided,
c. In case the shares are par value shares:
f. Issuance by the SEC of the certificate of incorporation.
- the par value of each share,
3.Formal organization and commencement of business - names, nationalities and residences of the
operation. original subscribers,
- the amount subscribed and paid by each
-Formal organization requires the adoption of by-laws
subscriber on his subscription
and the election of the board of directors and of the
d. In case of no par value, the articles need only state
administrative officers.
such fact, and the number of shares into which said
share capital is divided.
- It also includes the taking of such other steps as are
9. If it be a non-stock corporation, the amount of its
necessary to enable the corporation to transact the
capital, the names, nationalities and residences of the
legitimate business or accomplish the purpose for which
contributors and the amount contributed.
it was created.
BY-LAWS Components of a Corporation
These are the rules of action adopted by the
corporation for its internal government and for the Corporators
government of its officers, shareholders or members. -are those who compose a corporation whether as
The by-laws shall be adopted within one month from shareholders or members, at any time.
the issuance of the certificate of incorporation by the
-This term includes incorporators, shareholders or
Securities and Exchange Commission. Failure to file a
members (Sec.5).
code of by-laws shall render the corporation liable for
the revocation of its registration. A private corporation Note: A corporation or a partnership can be a
may provide in its by-laws for: corporator, but cannot be an incorporator. A
1. The time, place and manner of calling and partnership can be a corporator in a corporation but a
conducting regular or special meetings of the corporation cannot be a general partner in a
directors or trustees; partnership.
2. The time and manner of calling and conducting
regular or special meetings of the shareholders Incorporators (5-15)
or members; -are shareholders or members mentioned in the articles
3. The required quorum in meeting of of incorporation as originally forming and composing
shareholders or members and the manner of the corporation and are signatories to said articles of
voting therein; incorporation (Sec.5 ).
4. The form for proxies of shareholders and
members and manner of voting them; -They must be natural persons ( i.e. human beings) as
5. The qualifications, duties and compensation of distinguished from artificial beings (e.g., a corporation
directors or trustees, officers and employees; or a partnership).
6. The time for holding the annual election of -An incorporator will always retain his status as such
directors or trustees and the mode or manner though no longer having an interest in the corporation.
of giving notice thereof;
7. The manner of election or appointment and the The Code specifies that five or more persons, not
term of office of all officers other than directors exceeding fifteen, may form a private corporation
or trustees; provided that they are of legal age, owners or
8. The penalties for violation of the by-laws; subscribers to at least one share of capital stock and
9. In the case of stock corporations, the manner of that the majority are residents of the Philippines.
issuing stock certificates; and
Note: All incorporators (if they continue to be
10. Such other matters as may be necessary for the
shareholders ) are corporators of a corporation, but
proper or convenient transaction of its
not all corporators are incorporators.
corporate business and affairs.
Shareholders
Rights of a Shareholder  stockholders
The following are some of the rights of a shareholder:  are corporators in a stock corporation. (Sec. 5).
1. Right to be issued certificate of stock or other  Shareholders may be natural or juridical persons.
evidence of share ownership and to transfer
such shares. Members
2. Right to attend and vote in person or by proxy are corporators of a non-stock corporation (Sec. 5).
at shareholders’ meetings.
3. Right to elect and remove directors. Subscribers
4. Right to adopt, amend or repeal the by-laws. are persons who have agreed to take and pay for
5. Right to purchase a portion of any new shares original, unissued shares of a corporation formed or to
issued to maintain the same percentage of be formed .
stock ownership. This right is known as the pre-
emptive right. However, this right is not Note: All incorporators are subscribers but a subscriber
absolute and may be denied. need not be an incorporator.
6. Right to receive dividends when declared.
Promoters
7. Right to inspect corporate books and records,
are persons who bring about or cause to bring about
and to receive financial reports of the
the information and organization of a corporation.
corporation’s operations
8. Right to participate in the distribution of
Underwriters
corporate assets upon dissolution.
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 25% - 25% rule - CORPORATION
buy from the issuing corporation any unsold portion
Mnimum Subscription and Paid-In Capital
at a stated price; or
At the time of incorporation, at least twenty-five (25%)
 agreed to use his best efforts to market all or part
percent of the authorized capital stock (or share
of an issue; or
capital) as stated in the articles of incorporation must
 offered for sale shares he has purchased from a be subscribed and at least twenty-five (25%) percent of
controlling stockholders the total subscription must be paid upon subscription,
the balance to be payable on a date or dates fixed in the
Classes of Shares in General
contract of subscription without need of a call, or in the
1. Par value shares. absence of a fixed date or dates, upon call for payment
by the Board of Directors.
One in which a specific amount is fixed in the articles of
incorporation and appearing on the certificate of stock. In no case shall the paid-in capital be less than five
The par value is the minimum issue price of the shares. thousand (5,000) pesos (The Corporation Code of the
Philippines, Sec. 13). In practice, the SEC requires
2. No-par value shares. higher minimum capital requirements for particular
 One without any value appearing on the face of types of corporations.
the certificate of stock. Minimum Subscription and Paid-In Capital
 A no-par value share may have a stated value -These requirements are mandatory.
which may be fixed in the articles of
incorporation or by the board of directors or -The Securities and Exchange Commission shall not
the shareholders. accept the articles of incorporation of any stock
corporation unless accompanied by a sworn statement
 Thus, the issue price may vary from time to of the treasurer elected by the subscribers showing that
time as it is usually fixed based on the book the minimum subscription and paid-in capital
value of the corporation’s shares. requirements have been complied with.
3. However, the minimum stated value of a no-par -Observe that the New Corporation Code used the term
value share is five pesos (P5.00) per share (Sec. 6). “total” subscription as the basis for the application of
Banks, trust companies, insurance companies, public the second 25%. It is not necessary that each and every
utilities, and building and loan associations area not subscriber shall pay twenty-five percent of his
permitted to issue no-par value shares of stock. subscription. It is enough that twenty-five percent of
the total subscription is paid.
4. Voting shares. -Those issued with the right to vote.
Minimum Subscription and Paid-In Capital
5. Non-voting shares. -Those issued without the right to
vote. Illustration. Assume that the authorized share capital is
P2,000,000 divided into 20,000 shares with a par value
6. Ordinary shares. -These shares entitle the holder to of P100 per share. The subscribed share capital must be
an equal pro-rata division of profits without any P500,000 which is 25% of the authorized share capital
preference. of P2,000,000. The paid-in-capital should be P125,000
7.Preference shares-These shares entitle the holder to which is 25% of the subscribed share capital of
certain advantages or benefits over the holders of P500,000.
ordinary shares. Suppose that the authorized share capital is P60,000
8. Promotion shares. -Those issued to promoters as divided into 6,000, P10 par value shares. Applying the
compensation in promoting the incorporation of a 25%-25% rule, the paid-in capital will only amount to
corporation, or for services rendered in launching or P3,750. The incorporators must pay P5,000 because this
promoting the welfare of the corporation. is the minimum paid-in capital required by law.

9. Treasury shares. - A stock that has been issued by the Minimum Subscription and Paid-In Capital
corporation as fully paid and later reacquired but not In case of no-par value shares, the 25% requirement will
retired. be based on the authorized number of shares. If the
10. Convertible shares. A stock which is convertible or authorized capital is pegged at 2,000 no-par value
changeable from one class to another class. shares, then at least 500 no-par value shares must be
subscribed.
Shareholders SHAREHOLDER'S EQUITY
-owners of the corporation

Board of directors
-elected by the shareholders SHARE CAPITAL
-responsible for the formulation of the overall policies Preference Shares xx
for the corporation and for the exercise of corporate Ordinary Shares xx
powers. Share Premium xx
-elects chairman of the board
-designate professional management team or Total Share Capital XX
administrative officer
RETAINED EARNINGS xx
President
-must be a director of the corporation, but he cannot TOTAL SHAREHOLDERS' EQUITY XX
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 SHARE CAPITAL- reflects the amount of resources
director received by a corporation as a result of investment by
shareholders, donations or other share capital
Corporate Secretary transactions.
-must be a resident and citizen of the Philippines
-it is generally the duty of the secretary to make and RETAINED EARNINGS- (or accumulated profits or losses
keep its records and to make proper entries of the ) is the amount of capital accumulated and retained
votes, resolutions and proceedings of the shareholders through the profitable operations of the business
and directors in the management of the corporation.
SHARE CAPITAL- It is the shares to be subscribed and
paid in or secured to be paid in by the shareholders,
Corporate Treasurer-is the proper officer entrusted
either in money, property or services, at the time of
with the authority to receive and keep the money of the
corporation and to disburse them as he may be organization of the corporation or afterwards, and upon
authorized. which it is to conduct its operations.

CORPORATE BOOKS AND RECORDS LEGAL CAPITAL- Legal capital is that portion of the
contributed capital or the minimum amount of paid-in
Stock and transfer book - It is a record of the names of capital, which must remain in the corporation for the
shareholders , installment paid and unpaid by protection of corporate creditors
shareholders and dates of payment, any transfer of
stock and dates thereof, by whom and to whom made. Determination of LEGAL CAPITAL
Books of accounts - These represent the record of all PAR VALUE- is the aggregate par value of all issued and
business transaction. The books accounts normally subscribed shares.
include the journal and the ledger.
NO PAR VALUE- the total consideration received by the
Subscription book - It is a book of printed blank corporation for the issuance of its shares to the
subscription.
shareholders including the excess of issue price over the
Shareholders’ ledger -It is a ledger which details the stated value (Section 6, par. 3, Corporation Code of the
number of shares issued to each shareholder . Philippine).
Subscribers’ ledger-It is a subsidiary ledger for the SHARE PREMIUM- (or Additional Paid-in Capital). It is
subscriptions receivable account; it reports the the portion of the paid-in capital representing amounts
individual subscriptions of the subscribers. paid by shareholders in excess of par. It may also result
Stock certificate book -It is a book of printed blank from transactions involving treasury stocks, retirement
certificates of stock. of shares, donated capital, share dividends and any
other “gain” on the corporation’s own stock
SHARE CAPITAL transactions.
-The owners’ equity section of a corporation’s
Two Basic Types of Shares
statement of financial position is called shareholders’
equity. 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 WITHOUT PAR- When shares without par value are
advantages over ordinary shareholders. These special sold, the proceeds should be credited to the share
benefits relate either to the receipt of dividends when capital account.
declared before the ordinary shareholders (preferred as
-If the no-par stock has a stated value, the excess
to dividends) or to priority claims on assets in the event
proceeds over stated value may alternatively be
of corporate liquidation (preferred as to assets).
credited to share premium.
Terms Related to Share Capital
Considerations for Issuance of Shares
Authorized Share Capital
SHARE CAPITAL
-The number of authorized shares indicates the -Actual cash paid to the corporation
maximum number of shares the corporation can issue -Tangible or intangible properties actually received by
as specified in the article of incorporation. the corporation
-Labor already performed for or services actually
-This maximum number of shares when multiplied by
rendered to the corporation
the par value of the share will yield the authorized
-Previously incurred indebtedness by the corporation
share capital.

-Note that any increase or decrease in the authorized Actual cash paid to the corporation
share capital requires prior approval of the SEC and -Most share issues are for cash since the primary
formal amendment to the articles of incorporation reason for issuing shares is to raise capital for a
corporation’s operating activities. The entries to record
Issued Share Capital the issuance of shares for cash will depend on whether
-These are shares which have been sold and paid for in the share is with or without par value.
full.
-Issued shares may include treasury shares.
-Share Capital, either Ordinary Shares account or SUBSCRIPTION OF SHARES
Preference Shares account, is credited for the total par
The subscription contract is a legally binding contract
value of fully collected subscriptions or in the case of
which provides for
no-par value shares, for the total consideration received
-the number of shares subscribed
in relation to the issue.
-the subscription price
-Share Capital is debited only when the issued shares
-the terms of payment and
are retired, redeemed or canceled by the corporation.
-other conditions of the transaction

Subscribed Share Capital

A subscriber becomes a shareholder upon subscription
-It is the portion of the authorized share capital that has
but the stock certificates evidencing ownership over
been subscribed but not yet fully paid.
shares of stock are not issued until the full collection of
-This shareholders’ equity account is credited for the
the subscription. -Set up Receivable Account
total par value of the shares subscribed and debited for
“Subscription Receivable
the total par value the fully of collected subscriptions.
Subscription Receivable
Outstanding Share Capital
Shareholders’ equity account
-These are issued shares, which are in the hands of the
-Presented in the statement of financial position as a
shareholders.
deduction from the related Ordinary Shares.
-The number of outstanding shares will equal the
difference between the issued shares and the treasury Subscribed Ordinary Shares 50,000.00
shares. Less: Subscription Receivable -
50,000.00
Treasury Stock Current Asset Account
-These are issued shares acquired by the corporation -When it is collectible within one year
but not retired and are therefore, awaiting to be
reissued at a later date.
Subscriber Fails to Settle
ACCOUNTING PROCEDURE -Declared delinquent
ISSUANCE OF SHARE CAPITAL -Public auction (these shares will be sold to the person
who is willing to pay the “offer price” which includes the
WITH PAR- When shares with par value are sold, the full amount of the subscription balance plus accrued
proceeds should be credited to the share capital interest, cost of advertisement and expenses of auction
account to the extent of the par value of the shares, sale in exchange for the smallest number of shares.
with any excess being reflected as share premium. -Highest bidder
PUBLIC AUCTION -No gain or loss shall be recognized in profit or loss on
NO BIDDER the purchase, sale, issue or cancellation of an entity’s
-The corporation may bid for the delinquent shares and own equity instrument.
the total amount due shall be credited as paid in full in
-Treasury stock is not an asset because the corporation
the books of the corporation. These shares shall be
may not own shares of itself. To reiterate, it is reported
considered as TREASURY SHARES.
as a deduction from the total shareholders’ equity.
SHARE CAPITAL PURCHASE OF TREASURY STOCK
NON CASH CONSIDERATIONS
par or stated value method
assets -treasury stock is debited for an amount equal to the
Measurement: par stated value of the stock reacquired
1. Fair Value of goods/ assets received
2. Fair Value of EQUITY INSTRUMENTS. cost method
-is the preferred method of accounting for treasury
Services stocks by the Accounting Standards Council as stated in
Measurement: SFAS No. 18 , par . 6.
1. Fair Value SERVICES received.
2. Fair Value of EQUITY INSTRUMENTS. Cost method
-treasury stock is recorded at cost regardless of whether
Outstanding Liability the share is acquired below or above par or stated
Measurement: value.
1. Amount of Liability set off -If treasury stock is purchased for cash, the cost is equal
to the cash payment.
2 methods of accounting for share capital
1.journal entry method -If the treasury stock is acquired for non-cash
2. memorandum method consideration, the cost is usually measured by the
-The difference between the two lies in the entries recorded amount of the non-cash assets surrendered
pertaining to authorization and issuance of share given in exchange.
capital. -The purchase of treasury shares does not decrease the
AUTHORIZATION number of shares issued; only the outstanding shares
SHARES SUBSCRIPTION decrease.
COLLECTION
ISSUANCE OF STOCK -The effect of the purchase is to decrease both total
CASH SUBSCRIPTION AT PAR assets and total shareholders’ equity.

-Treasury stocks transactions may affect cash flows but

TREASURY STOCK
they have no effect on the profit of the corporation.
-are shares of stock which have been issued and fully
paid for, but subsequently reacquired by the issuing RETIREMENT OF TREASURY STOCK
corporation either by purchase, redemption, donation -The shares purchased may be subsequently retired
or through other lawful means. -The Ordinary Shares account is reduced by its par
value.
-Such shares may again be disposed of for a reasonable
-The number of shares issued is reduced by the stock
price fixed by the board of directors.
retired.
Section 41 of Corporation Code provides that a stock -The treasury stock account is credited at cost.
corporation has the power to purchase its own shares Retirement may result is a “gain” or “loss” (note IAS 32,
for a legitimate purpose provided it has unrestricted par. 33).
retained earnings. Some of the reasons for the purchase
of treasury stock are as follows: Donated Capital
(1) to support employee stock compensation plans; -Contributions, including shares of the corporation,
(2) to improve the stock market price by decreasing received from shareholders should be recorded at the
the supply of shares; fair market value of the items received, with the credit
(3) to avoid takeover by an outside party. going to share premium . If significant, such
contributions may be designated as donated capital
(SFAS No. 18, par.28).
-Paragraph 33 of International Accounting Standards -If the donation is in the form of shares of the
(IAS) No. 32, Financial Instruments: Presentation, states corporation , the account share premium or donated
that, if an entity reacquires its own equity instrument, capital is credited at the time the shares are reissued.
these instruments, (‘treasury shares’) shall be deducted
from equity.