MODULE 5 PART 1

ACCOUNTING FOR
CORPORATION
UNDERSTANDING THE NATURE , CONCEPTS
AND LAWS PERTAINING TO A CORPORATE
FORM OF BUSINESS ORGANIZATION .
LEARNING OBJECTIVES
After studying this chapter, the students should be able to
▪ define and explain the nature of a corporation and its
formation;
▪ identify essential attributes of a corporation, characteristics and
the basic organizational structure;
▪ differentiate a Corporation from other forms of business
organization such as partnership; explain its advantages and
disadvantages;
▪ enumerate and describe the different kinds of corporation
under Philippine laws;
▪ describe the classes of shares of a corporation and the
different books and records for financial reporting.
CORPORATION DEFINED..
A Corporation is an
⮚ an artificial being (juridical person)
⮚ created by the operation of law
⮚ with rights of succession
⮚ has powers, attributes and properties
expressly authorized by law or incident
to its existence.
DEFINITION CONTINUED...
Corporate Powers:
⮚ those expressly granted by law
⮚ power inherent to corporate existence
⮚ implied powers
RELATED TERMS:
ULTRA VIRES ACT– is an act or contract of a corporation entered
beyond the powers expressly or impliedly inferred upon the
corporation.
INTRA VIRES ACT – an act within the legitimate powers of a
corporation.
ILLEGAL ACTS – acts that are contrary to law, morals, good customs,
public order or public policy.
 CHARACTERISTICS OF A
CORPORATION
Corporations have certain characteristics unique to this form of
organization:
▪ Capital Acquisition - easier to acquire debt and equity (not constrained
by the financial resources of a few owners)
▪ Limited liability – liability to corporate creditors are not transferrable to
shareholders ( extent is only up to the amount of his subscription)
▪ Life span – it enjoys a stable life, theoretically, it can operate forever,
sometimes outlasting its owners unless otherwise dissolved for some
reasons.
▪ Professional Management – professional managers are hired by the
owners/investors to handle the oversight of the business on their behalf.
CHARACTERISTICS ...
▪ Ownership interest
⮚ it is based on the numbers of shares owned .
⮚Buying or selling of shares shifts the ownership to a different
investor.

▪ Separate entity
⮚as a legal entity, it operates separately and distinct from its owners .
⮚transactions of the business are different from that of the
shareholders
 ADVANTAGES & DISADVANTAGES
ADVANTAGES DISADVANTAGES
1. Limited liability 1. Incorporation and
2. Can exist with continuity operation is costly
3. Shares of ownership are 2. Highly regulated
transferable 3. Heavier taxation
4. Can attract more investor** 4. Complicated formation
5. Centralized management and management
5. Minority shareholders
**BLUE CHIP-shares of corporation who are subservient to the
has a national reputation to operate wishes of majority.
profitably in good and bad times.
 TYPICAL CORPORATE
ORGANIZATIONAL STRUCTURE
The basic type consists of the following:
1. Shareholders – owners of shares in a corporation
2. Board of Directors – headed by Chairman of the
Board
3. Officers of the corporation headed by the
President or CEO who must be a director
4. Employees – carry out the tasks from the top
management associated to the company’s mission.
 KINDS OF CORPORATION
1. According to purpose of creation
A. PUBLIC CORPORATION – organized for the government
B. PRIVATE CORPORATION – created for private aim /profit
2. According to shares authorized to issue
A. STOCK CORPORATION – share capital are divided into
shares and shareholders are entitled to dividends
B. NON-STOCK CORPORATION-no stocks are issued and
non-profit in nature and owners are called members
3. According to whether for charitable or not
A. ECCLESIASTICAL CORPORATION-for religious purposes
B. ELEEMOSYNARY CORPORATION-created not for private
gain or profit but devoted for charity
C. CIVIL CORPORATION-established for business
KINDS CONTINUED...
4. According to legal right to corporate existence
A. DE JURE CORPORATION-exists in fact and in law
B. DE FACTO CORPORATION-exists in fact, not in law
5. According to degree of public participation as to share
ownership
A. CLOSE CORPORATION-limited to selected family
B. OPEN CORPORATION-shares are available to public
C. PUBLICLY-HELD CORPORATION-shares are listed
6. According to relation to another corporation
A. PARENT OR HOLDING CORPORATION-has significant
influence over another corporation or subsidiary.
B. SUBSIDIARY CORPORATION-controlled by another such as a
parent or holding company.
KINDS ...
7. Other kinds of corporation
A. QUASI-PUBLIC - a private corporation that has
accepted from the state the grant of a
franchise or contract involving
performance of public duties e.g. Meralco,
PLDT, LRT, MRT
B. QUASI CORPORATION – assoc. of government
or political institution , not a corporation in full
sense but was invested by law with some
attributes and rights of a corporation for its
existence unaffected by death or disability of
members e.g. Board of Accountancy , Board
of Nursing
 STEPS ON HOW TO ORGANIZE A
CORPORATION
1. Promotion – the process of bringing together the incorporators
or persons interested in the business.
2. Incorporation – a legal process used to form a corporate entity
or company thus declaring the firm’s assets and income separate
from its owners.
3. Formal organization and commencement of business
operations - according to Corporation Code of the Phils, a
corporation must formally organize and commence transaction of
its business within five (5) years from the date of incorporation. It
is not allowed for a corporation to be continuously inoperative for
a period of at least five (5) years, even if it has already
commenced business.
 REGISTRATION
The agency of the government where corporate businesses are
registered is the SECURITIES AND EXCHANGE COMMISSION.
FOR DOCUMENTATION AND FILING PURPOSES:
ARTICLES OF INCORPORATION
Business name and address , incorporators name with nationalities and
addresses, nature of business, directors and trustees, term of existence,
amount of capitalization with no. of shares and par value if it is a stock
corporation, if non-stock the amount of capital must be stated.
BY- LAWS
Rules of action adopted by the corporation for the internal government of
its officers , shareholders or members . It is to be adopted within one (1)
month after issuance of Certificate of Incorporation by SEC.
 COMPONENTS OF A CORPORATION
1. Corporators-those who compose the corporation whether as shareholders
or members.
2. Incorporators-shareholders or members originally forming and composing
the corporation and signatories thereof to the Articles of Incorporation.
3. Shareholders or stockholders-they are corporators in a stock corporation
which can be a natural or juridical persons.
4. Members-are corporators of a non-stock corporation.
5. Subscribers-those who have agreed to take the original unissued shares
under subscription agreement .
6. Promoters-persons who bring about the formation and organization of a
corporation.
7. Underwriters-investment bankers who agreed to use his best efforts to
market all or part of an issue of securities.
8. Independent director-elected by the shareholders, a person who is
independent of management and free from any business relationship to be
able to exercise honest judgement.
 RIGHTS OF A SHAREHOLDER
1. Right to be issued certificate of stock or other evidences of share
ownership and to transfer such.
2. Right to attend and vote in person or by proxy at shareholder’s
meeting.
3. Right to elect and remove directors.
4. Right to adopt, amend or repeal by-laws.
5. Right to receive dividends when declared.
6. Right to inspect corporate books and records and receive financial
reports about corporation’s operations.
7. The right to participate in the distribution of corporate assets upon
dissolution.
8. The right to exercise pre-emptive right.
⮚PRE-EMPTIVE RIGHT- the right granted to shareholders
to have the first option to subscribe to any future
issuance or disposition of shares before it will be offered
to new investors so that the shareholder may maintain
his/her proportional ownership in the company thus
preventing stock dilution.

⮚This right is not absolute (not dependent on something

else)

⮚It is also called subscription right or subscription privilege

 CLASSES OF SHARES OF STOCK
1. Ordinary Shares (Common) – a share which entitles the holder to
an equal pro-rata division of profits without any preference.
2. Preference shares – a share which entitles the holder to a fixed
dividend, whose payment takes priority over that of the holder of
ordinary shares . Preference shares are issued with PAR VALUE .
3. Treasury Shares-are fully paid shares bought back by the issuing
company thus reducing the number of shares outstanding in the open
market.
4. Convertible shares-a share which is convertible or changeable from
one class to another class e.g. preference share to ordinary share.
5. Callable stock-shares at stake by investor which the issuing company
can buy back. (both classes of shares - ordinary and preference)
 UNDERSTANDING ORDINARY
SHARES & PREFERENCE SHARES
ORDINARY SHARES PREFERENCE SHARES
▪ Have voting power ▪ Often has no voting power
▪ No right to dividend in arrears ▪ Cumulative preference holder
▪ Faces more risks because dividend have the right to receive dividend
varies according to profit. in arrears **

▪ Cannot be redeemed ▪ Less risky due to fixed rate of

return
▪ If company collapses, no priority in
capital repayment. ▪ Can be redeemed

▪ Non convertible to other type of ▪ Priority over company assets in

stocks case of bankruptcy

** dividend of prior years ▪ Convertible to ordinary shares

RELATED TERMS
• PAR VALUE SHARE –share with minimum issue price per share
as per Articles of Incorporation.
⮚ PAR VALUE- per share value indicated in the stock certificate
• NO PAR VALUE SHARE- one without any value appearing on the
face of stock certificate.
• STATED VALUE SHARE- a no par value share to which the
directors assigned value per share.
• PROMOTION SHARES-those issued to promoters as
compensation.
• STOCK CERTIFICATE-a legal document in a physical piece of
paper certifying ownership of specific number of shares of stock in a
Corporation.
 CORPORATE BOOKS & RECORDS
These books are kept in the principal office of the
company such as
1. MINUTES BOOK-contains minutes of the meetings of the directors
and shareholders
2. STOCK &TRANSFER BOOK-a record of the names of shareholders
alphabetically arranged, installment paid and unpaid by shareholders on
all stock for which subscription has been made and dates of installment
payment. Any transfer of stock and dates thereof are also recorded.
3. STOCK CERTIFICATE BOOK-contains the list of every share in a
company , numbered in order, with the name of the current owner of
every single share. It is commonly called Shareholder’s Register.
4. BOOKS OF ACCOUNTS – record of all business transactions of the
company which include the General Journal and General Ledger.
BOOKS...
5. SUBSCRIPTION BOOK- a book of printed blank
subscription

6. SHAREHOLDER’S LEDGER-a ledger which details the

number of shares issued to each shareholder

7. SUBSCRIBER’S LEDGER-It is a subsidiary ledger for the

subscription receivable account. It reports the individual
subscription of the subscriber.
CORPORATION VS. OTHER FORMS OF
BUSINESS ORGANIZATION
• Partnership and sole proprietorship has the same Asset and Liability
elements with Corporation

• The only difference is in the Equity Section of the Balance Sheet.

❖if Capital Account is maintained in Sole Proprietorship &

Partnership, Contributed Capital (also known as Paid-in
Capital and Stocks or Shares component are for the
corporation.
 EQUITY...

• Owner’s equity is for the partnership and sole proprietorship while

Shareholder’s equity is for the corporation.

The accounting equation for a corporation will be

ASSETS = LIABILITIES + SHAREHOLDERS’ EQUITY

 AMENDMENT TO
CORPORATION CODE
OF THE PHILIPPINES
THE REVISED CORP. CODE OF THE
PHILS.
WHAT THE REGULATION SAYS?
❑ Republic Act 11232 known as the Revised Corporation Code of the Phils which
expressly repeals Batas Pambansa Blg. 68 or CCP, aims to improve the ease of doing
business in the country. This was signed by Pres. Duterte and took effect on February
23, 2019.
❑ It simplifies the requirements to set-up and register a corporation with SEC and provides
for the recognition of technology and its use to facilitate government and internal
corporate processes.

A. MINIMUM NO. OF SHAREHOLDERS, DIRECTORS & TRUSTEES

⮚ Removal of minimum number of shareholders, directors, trustees and minimum capitalization requirements.
⮚ It has removed “subject to compliance with special laws” , the minimum subscribed and paid-up capital
requirement for a stock corporation. No minimum required subscription and payment.
CONTINUED...
B. ONE PERSON CORPORATION- the new law permits natural person, trusts or estates to form one person corporation, single shareholder.
C. CORPORATE TERM-as revised, a corporation shall have perpetual existence unless its Articles of Incorporation provided otherwise.
A corporate term may be extended or shortened by amending the Articles of Incorporation provided that no extension may be made earlier than
three (3) years prior to the original expiry date unless there is justifiable reasons for an earlier extension.
⮚ A corporation who intend to be bound by specific term must notify the commission.
⮚ For a corporation whose term has already expired, it may submit an application to SEC for revival of its corporate existence subject to
certain requirements.
⮚ No application for revival of certificate of incorporation of banks and quasi-banking , preneed, insurance and trust companies, non-stock
savings and loan associations, pawnshops , corporations engage in money services business and financial intermediaries unless
accompanied by a favorable recommendation of the appropriate government agency.
D. ELECTRONIC FILING & MONITORING SYSTEM –mandates SEC to develop and implement a system to enable electronic submission of
application , reports and other documents as well as sharing information with other government bodies.
E. NON-USE OF CORPORATE CHARTER AND CONTINUOUS INOPERATION-if a corporation does not formally organize and commence
operation of its business, within five (5) years from the date of incorporation, the certificate of incorporation shall be deemed revoked as of the day
following the end of the five (5)-year period.
However, if it has already commenced its business but subsequently becomes inoperative for a period of at least five (5) consecutive years , then
after due notice and hearing , the commission may place the corporation under delinquent status.

NOTE:

Under DELINQUENT STATUS, a corporation shall have two (2) years to resume operations and comply with the SEC
requirements and upon compliance, the commission will issue order lifting the delinquent status. Failure to comply with the
req and resume operation within the given period shall cause revocation of its certificate of incorporation upon reasonable
notice is given.
CONTINUED...
F. CLASSIFICATION OF SHARES – shares in stock corporation may be
divided into classes or series of shares or both. No share may be deprived
of voting rights except for those classified and issued as “preferred” or
“redeemable shares”.

G. PAR VALUE OF A SHARE – Shares may or may not have a par value ,
Provided insurance and preneed companies, banks, trusts, public utilities ,
building and loan associations and other corporations authorized to obtain
funds from the public , publicly listed or not, shall not be permitted to
issue no par value stock. Preference shares may be issued only with a
stated par value.

❑No par value share issued shall be deemed fully paid and non-assessable
and the holder of such shall not be liable to the corporation and its
 CONTINUED..
H. FOUNDERS’ SHARE- may be given certain rights and privileges not enjoyed by
the owners of other stocks. Exclusive right to vote and be voted for in the election
of directors is granted for a limited period not to exceed five (5) years from the date
of incorporation provided that the exclusive right shall not be allowed if its exercise
will violate Commonwealth Act No. 108 known as “Anti-Dummy Law” and RA No.
7042 known as “Foreign Investment At of 1991” and other pertinent laws.
I. INCORPORATION & ORGANIZATION OF PRIVATE CORP.- any person,
partnership, association or corporation, singly or jointly with others but not more
than fifteen (15) in number may organize a corporation for any lawful purpose/s.
Natural persons licensed to practice a profession and partnership or association
organized for the purpose of practicing a profession shall not be allowed to organize
a corporation unless otherwise provided under special laws.
J. CAPITALIZATION-a stock corporation shall not be required to have a minimum
capital stock except as otherwise specifically provided by special laws.
CONTINUED...
K. BOARD OF DIRECTORS/TRUSTEES AND OFFICERS-they shall
exercise corporate powers , conduct all business and control of all
properties of corporation.
⮚The BOD shall be elected for a term of one (1) year from among the
holders of stocks registered in the corporation’s books while trustees
shall be elected for a term not exceeding three (3) years from among
the members of a corporation.
⮚A director who ceases to own at least one share of a stock or a
trustee who ceases to be a member of a corporation shall cease to be
such.
⮚Immediately after election of BOD, an election must be formally
organized to elect the corporate officers composed of
a) President, must be a director himself
b) Treasurer – must be a resident