Republic Act No.

11232 – Revised Corporation Code of the Philippines

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 incident to its existence. (Section 2, Revised corporation Code of the Philippines
– Feb 23, 2019)

ATTRIBUTES OF A CORPORATION

Two kinds of Being Process of Creation

1. Human Being – Natural person Operation of Love
2. Artificial Being – Juridical person Operation of Law – Mere agreement cannot give rise to a corporation
- Separate legal entity with personality that is separate from that of its individual owners.

Right of Succession
- Irrespective of death, withdrawal, insolvency, or incapacity of the individual members or shareholders,
and regardless of the transfer of their interest or share capital, a corporation can continue its existence
up to the period of time stated in the articles of incorporation otherwise, the existence is perpetual
(Section 11, RCC)

Powers, attributes, properties authorized by law.

- Being a mere creation of law, a corporation can only exercise powers provided by law and those
powers which are incidental to its existence

Ownership divided into shares

- Proprietorship of Corporation is divided into units called Share Capital/Stocks. The buyers of the share
capital are called shareholders or stockholders and are considered owners of the business.

Board of Directors/Trustees
- Management of the business is vested in a board of directors elected by the shareholders. They are
the governing body or decision-makers of the corporation. The Revised Corporation Code provides
that the number of directors/trustees shall not more than fifteen.
HOW MANY INCORPORATORS?
ADVANTAGES DISADVANTAGES

Continuous existence - perpetual Not easy to organize

Ability obtain strong credit line Limited liability – weak credit line

Large source of funds Subject to rigid government control

Limited liability Subject to more taxes

Transferability of shares Restricted active participation of shareholders

Centralized management

CLASSES OF CORPORATION
CATEGORY CLASSES DESCRIPTION
Capital is divided into shares of stocks and is authorized
to distribute corporate earnings to holders on the basis
Stock Corporation
of shares held. The owners are called stockholders or
As to membership
shareholders.
holdings
Capital comes from fees paid by individuals composing
Non-Stock Corporation it. The owners are called members. (Labor, Education,
Athletic organizations, civic and business leagues, etc)
Organized to govern a portion of the state.
Public Corporation
(Municipalities, provinces)
Private Corporation Organized for a private benefit, aim or end.
As to purpose
Private corporation which is given a franchise to
Quasi-public Corporation perform functions of a public character (MERALCO and
PLDT)
De jure Exist in both law and fact
As to compliance of law
De facto Exist only in fact but not in law
Domestic Organized under Philippine law
As to law of creation
Foreign Organized under the laws of other countries
Ownership is widely held by many investors, usually a
Open corporation
As to extent of private stock corporation
membership Private corporation in which 50% of its stocks is owned
Closely-held/family corporation
by five persons or less.
COMPONENTS OF A CORPORATION
1. Incorporators – are those stockholders or members mentioned in the articles of incorporation as originally forming
and composing the corporation and who are signatories thereof.
2. Corporators – are those who compose a corporation, whether as stockholders or members in a stock or non-stock
corporation.
3. Stockholders/shareholders – holders of stocks in a stock corporation
4. Members – members of a non-stock corporation
5. Promoters – persons who takes the initiate to create or organize a business
6. Subscribers – all the initial shareholders

STAGES IN ORGANIZING A CORPORATION

The process of organizing a corporation generally consists of three stages which normally require the aid of legal,
competent advisers. These three stages are
1. Promotion – the incorporators make preliminary arrangements to set up a tentative working organization and
to solicit subscriptions to raise sufficient capital for the business.

2. Incorporation – the process of formalizing the organization of the corporation.

a. Drafting the articles of incorporation
b. Filing the articles of incorporation with the SEC (Securities and Exchange Commission)
c. Approval of the SEC through issuance of Certificate of Incorporation

3. Commencement of the business**

**The business should start operation within 2years from the date of incorporation. Otherwise, it will
automatically dissolve the corporation without the need of hearing.

Note: organization costs/pre-operating costs (such as filing fess, cost of printing stock certificates, promoters’
commission and legal fees) are charged to expense in the period incurred.

ARTICLES OF INCORPORATION (Title II, Sec 14, RCC)

- Powers and limitations conferred upon the corporation by the government
1. The name of the corporation
2. The purposes or purposes of which the corporation is formed
3. The place of principal office of the corporation
4. The term of existence of the corporation (perpetual or how many years)
5. The names, nationalities and residence addresses of the incorporators
6. The names of the directors who will serve until their successors are duly elected and qualified in accordance with
the by-laws
7. The authorized share capital, the classes of share capital to be issued, and the number of shares and terms of each
class indicating the par value per share, if there is any.
8. The amount of subscriptions to the share capital, the names of the subscribers and the number of shares
subscribed by each
9. The name of the elected treasurer by the subscribers
10. Incorporators undertake to change the name (already used) of the corporation upon receipt of notice from SEC
11. That the corporation will engage in any business or activity reserved for Filipino citizens

BY LAWS (Title V, Sec 45, RCC)

- Provision for the internal administration of the corporation
a. The time, place and manner of calling and conducting regular or special meetings of the directors or trustees;
b. The time and manner of calling and conducting regular or special meetings of the stockholders or members;
c. The required quorum in meetings of stockholders or members and the manner of voting therein;
d. The modes by which a stockholder, member, director, or trustee may attend meetings and cast their votes;
e. The form for proxies of stockholders and members and the manner of voting them;
f. The qualifications, duties and compensation of directors or trustees, officers and employees;
g. The time for holding the annual election of directors of trustees and the mode or manner of giving notice thereof;
h. The manner of election or appointment and the term of office of all officers other than directors or trustees;
i. The penalties for violation of the by-laws;
j. In the case of stock corporations, the manner of issuing stock certificates; and
k. Such other matters as may be necessary for the proper or convenient transaction of its corporate business and
affairs.

CORPORATE RECORDS
1. Minute’s books
2. Stock and transfer book
3. Books of accounts
4. Shareholders’ ledgers
5. Subscribers’ ledgers
6. Share certificates book
 7. Other optional and supplementary records

RIGHTS OF A SHAREHOLDER
1. To share in the profit distribution of the corporation
2. The share in the distribution of assets upon liquidation
3. To vote in the election of directors during shareholders’ meeting *(exclusive for ordinary shareholders)
4. To maintain one’s ownership interest in the corporation through purchase of additional shares when a new share
capital is issued (pre-emptive right)

ACCOUNTING FOR CORPORATIONS

Sole Proprietorship – Asset = Liabilities + OWNER’S CAPITAL

Partnership – Asset = Liabilities + PARTNERS’ CAPITAL
Corporation – Asset = Liabilities + SHAREHOLDERS’ CAPITAL

Shareholders’ Equity has two major components – Share Capital and Retained Earnings.

Share Capital (contributed or paid-in capital) – reflects the amount of resources received by a corporation as a
result of investment by shareholders, donation or other share capital transactions.

Retained earnings (accumulated profits/losses) – is the amount of capital accumulated and retained through the
profitable operations of the business.

Terms related to Share Capital

i. Authorized Share Capital
The number of authorized shares indicates the maximum number of shares the corporation can issue. This
maximum shares when multiplied by the par value of share will yield the authorized share capital.

ii. Issued Share Capital

These are shares which have been sold and paid for in full.

iii. Subscribed Share Capital

It is the portion of the authorized share capital that has been subscribed but not yet fully paid.

iv. 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. (OS = IS – TS)

v. Treasury Share
These are issued shares acquired by the corporation but not retired.

vi. Par Value

Also called face or nominal value, is the lowest legal price for which a corporation may sell its share.

vii. Share Premium

The amount that a corporation receives for its shares over and above their par value.

viii. Treasury Shares

Reacquired shares by the issuing corporation.

Two basic types of Shares

1. Ordinary Shares
 This share represents the basic ownership class of corporation. When only one class of share is issued, it
must be ordinary share
 Entitles the holder to an equal or prorate division of profits without any preference or advantage over any
class of shares.
 Right to vote in the election of directors during shareholders’ meeting.

2. Preference Shares
 This share gives its owners/holders certain advantage over ordinary shareholders. Preferred as to
dividends and preferred as to assets.
 Entitles the holder to enjoy priority as to the division of dividends and distribution of assets upon
corporate liquidation.

Accounting for Share Capital

Two methods of accounting for Share Capital – the difference between the two lies in the entries pertaining to
authorization and issuance of share capital.
1. Memorandum Method
 2. Journal entry Method

Illustration:
On January 4, 2021, Min Yoon Gi, Inc. (MYGI) received its Articles of Incorporation authorizing the issuance of the
following shares:

5% Preference Shares, P100 par, 100,000 shares

Ordinary Shares, P50 par, 10,000,000 shares

The following transactions took place during 2021:

Jan 16. Sold 10,000 ordinary shares for P640,000 cash.
Feb 6. Exchanged 8,000 ordinary shares for a small concrete structure with a fair value of P512,000.
Mar 25. Issued 10,000 preference shares for P180 per share.
June 30. Sold 19,000 ordinary shares for P42 per share.
Oct 26. Sold 7,500 preference shares for P1,650,000.
Nov 3. Issued 1,000 ordinary share in payment for the services rendered by the lawyer valued at P55,000.

Required: Prepare journal entries to record each of the transactions listed using the journal entry and
memorandum methods and compute the total share capital for MYGI as at Dec 31, 2021.

Date Memorandum Method Journal entry Method

Unissued Preference Share P10,000,000
Authorized to issue 5% Preference Shares, P100 par, Unissued Ordinary Share P500,000,000
1/4 100,000 shares and Ordinary Shares, P50 par, Authorized Preference Share P10,000,000
10,000,000 shares Authorized Ordinary Share
P500,000,000
Cash P640,000 Cash P640,000
1/16 Ordinary Share Capital P500,000 Unissued Ordinary Share P500,000
Share Premium – Ordinary P140,000 Share Premium – Ordinary P140,000
Building P512,000 Building P512,000
2/6 Ordinary Share Capital P400,000 Unissued Ordinary Share P400,000
Share Premium – Ordinary P112,000 Share Premium – Ordinary P112,000
Cash P1,800,000 Cash P1,800,000
3/25 Preference Share Capital P1,000,000 Unissued Preference Share P1,000,000
Share Premium – Preference P800,000 Share Premium – Preference P800,000
Cash P1,368,000 Cash P1,368,000
6/30 Ordinary Share Capital P950,000 Unissued Ordinary Share P950,000
Share Premium – Ordinary P418,000 Share Premium – Ordinary P418,000
Cash P1,650,000 Cash P1,650,000
10/26 Preference Share Capital P750,000 Unissued Preference Share P750,000
Share Premium – Preference P900,000 Share Premium – Preference P900,000
Legal Expenses P55,000 Legal Expenses P55,000
11/3 Ordinary Share Capital P50,000 Unissued Ordinary Share P50,000
Share Premium – Ordinary P5,000 Share Premium – Ordinary P5,000
Authorized Preference Share P 10,000,000
Unissued Preference Share 8,250,000
Issued Preference Share P 1,750,000
Preference Share P1,750,000
Ordinary Shares 1,900,000 Authorized Ordinary Share P500,000,000
12/31 Share Premium – Preference 1,700,000 Unissued Ordinary Share 498,100,000
Share Premium – Ordinary 675,000 Issued Ordinary Share P 1,900,000
Total Share Capital P6,025,000
Share Premium – Preference 1,700,000
Share Premium – Ordinary 675,000
Total Share Capital P 6,025,000
Note: Share issuances for non-cash considerations
If share capital is issued for a non-cash consideration such as tangible property, intangible property, and
services, the proceeds is recorded at an amount equal to the following (in the order of priority):
a. Fair value of the non-cash consideration received.
b. Fair value of the share capital issued.
c. Par or Stated value of the share issued.

Issuance of share capital (with or without par value)

The entry to record the issuance of share capital depends on whether the stock is with par or without 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 share,
with any excess being reflected as share premium.
  When Shares without par value are sold:
- The proceeds should be credited to the share capital account (no par, no stated value). If no-par share
has a stated value, the excess proceeds over the stated value may be alternatively be credited to share
premium.

Illustration:
Roa Corporation’s articles of incorporation authorized the issuance of 100,000 ordinary shares. Roa sold the
following ordinary shares during 2019.
Feb 12, sold 1,000 shares for 100,000
July 10, sold 5,000 shares for 630,000
Nov 5, sold 7,500 shares for 1,050,000

Prepare journal entries to record each issuance, assuming that:

1. The ordinary share has a P100 par value.
2. The ordinary share has no-par or stated value.
3. The ordinary share has a P10 stated value.

Date With Par value No Par, No Stated value No Par, with Stated Value
Cash P100,000
Cash P100,000 Cash P100,000
2/12 Ordinary Share P10,000
Ordinary Share P100,000 Ordinary Share P100,000
Share Premium – OS 90,000
Cash P630,000 Cash P630,000
Cash P630,000
7/10 Ordinary Share P500,000 Ordinary Share P 50,000
Ordinary Share P630,000
Share Premium – OS 130,000 Share Premium – OS 580,000
Cash P1,050,000 Cash P1,050,000
Cash P1,050,000
11/5 Ordinary Share P750,000 Ordinary Share P 75,000
Ordinary Share P1,050,000
Share Premium – OS 300,000 Share Premium – OS 975,000

Subscription of Shares
There are times when a corporation sells its shares directly to investors on a subscription basis.

The subscription contract is a legally binding contract which provides for the number of the shares subscribed, the
subscription price, 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 stocks are not issued until the full collection of the subscription.

Illustration:
Antonio Bakery has authorized capital consisting of 25,000 shares of 9% cumulative preference shares, P100 par
value, and 25,000 shares of ordinary shares, P30 par value. Record the following transaction in a general journal:

a. Received subscription to 12,000 shares of preference shares at P103 per share, with down payment of
50% of the subscription price.
Cash P618,000
Subscription Receivable – Preference 618,000
Subscribed Preference Share P1,200,000
Share Premium – Preference 36,000

b. Received 30% of the subscription price from all subscribers.

Cash P370,800
Subscription Receivable P370,800

c. Received 20% of the subscription price from all subscribers and issued the stock certificate.
Cash P247,200
Subscription Receivable Preference P247,200

Subscribed Preference Share P1,200,000

Ordinary Share Capital P1,200,000

Delinquent Subscription/Subscription Default

If the shareholder does not pay on the date fixed for payment of the unpaid subscriptions, the shareholder is
declared delinquent and the delinquent share will be sold at public auctions. The delinquent shares will be sold to
the highest bidder.

Who is the highest bidder?

 The highest bidder is the person who is willing to pay the offer price of the delinquent shares for the smallest
number of shares.

Illustration:
Karl subscribed for 10,000 ordinary shares at par P100, paying P600,000 as initial payment. Due to unpaid
subscriptions, Karl is declared delinquent and the delinquent shares will be sold at public auctions. The offer price
is P450,000 including the balance due on the subscription and the interest. There are three bidders who are willing
to pay the bid price, namely: Maria, 4,500 shares; Rose, 5,500 shares; and Sheena, 6,000 shares. Maria is the
highest bidder.

 Initial Journal Entry

Cash P600,000
Subscription Receivable – Ordinary 400,000
Subscribed Share Capital – Ordinary P1,000,000

 After Bidding Journal entry

Cash P450,000
Subscription Receivable – Ordinary P400,000
Interest income 50,000

 Issuance of Share Journal entry**

Subscribed Share Capital – Ordinary P1,000,000
Ordinary Share Capital P1,000,000

**All 10,000 shares shall be deemed fully paid. Accordingly, Maria gets 4,500 shares and Karl (the original
subscriber) gets 5,500 shares.

Treasury Shares
Treasury shares are shares of stocks which have been issued and fully paid for, but subsequently reacquired by the
issuing corporation either by purchase, redemption, donation or through lawful means.

Requisites to qualify as treasury shares:

a. The shares must be entity’s own shares.
b. The shares must have been issued
c. The shares must be reacquired but not cancelled

 Purchase of Treasury Shares

When the cost method is used, the treasury share is recorded at cost regardless of whether the share is acquired
below or above par or stated value.

If the treasury share is acquired for cash, the cost is equal to the cash payment.

If the treasury share is acquired for non-cash consideration, the cost is usually measured by the amount of non-
cash assets surrendered or given in exchange.

Treasury share is not an asset because the corporation may not own share of itself, instead, it is reported as a
deduction from the total shareholders’ equity.

Illustration:
Sea Wind is a world class resort in Barangay Masao, Butuan City. The operations have been successful. To
consolidate the control over the enterprise and thus avoid a corporate takeover by outsiders, the board of
directors decided to minimize outstanding shares by purchasing 1,500 shares with a par value of P1,000 for
P2,000.

Prepare the journal entries:

1. Acquisition of treasury shares will be?
Treasury Share P3,000,000
Cash P3,000,000
2. Reissuance of treasury share. Assume that all treasury shares were reissued at cost.
Cash P3,000,000
Treasury Share P3,000,000
3. Reissuance of treasury share. Assume that all treasury shares were reissued at P2,500 per share.
Cash P3,750,000
Treasury Share P3,000,000
Share Premium – TS 750,000
4. Reissuance of treasury share. Assume that all treasury shares were reissued at P1,500 per share.
Cash P2,250,000
Share Premium – TS/RE 750,000
 Treasury Share P3,000,000

Corporate Operations
The accounting cycle of a corporation os essentially the same as that of a sole proprietorship and a
partnership. Transactions, such as purchase and sale of goods and payment of expenses and liabilities,
are recorded in the same manner as that of the two other forms of business organization.

At the end of the accounting period, the results of operation of the corporation and its financial position
are determined and the following problems are normally encountered.
1. Preparation of a work sheet
2. Preparation of financial statements
a. Statement of financial position
b. Statement of comprehensive income
c. Statement of changes in shareholders’ equity
d. Statement of cash flows
e. Notes to financial statement
3. Preparation of adjusting and closing entries

Shareholders’ Equity
Share Capital
Ordinary Share xx
Preference Share xx
Share Premium – Ordinary xx
Share Premium – Preference xx
Total Share Capital xx
Retained Earnings xx
Other comprehensive income xx
Subtotal xx
Less: Treasury shares xx
Total Shareholder’s Equity xx

Terms related to Retained earnings