accounting for corporation

CORPORATION

ACCOUNTING

Basic Considerations

DEFINITION

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

1. Artificial being

2. Created by operation of law

3. Right of succession

4. Powers, attributes and properties expressly

authorized by law or incident to its existence

5. Ownership interest comprised of share capital

6. Managed by a board of directors

Artificial Being:

- Not a real person

- Assumed by law as a person

- Separate and distinct from shareholders,

officers and employees

Created by operation of law:

- Cannot exist by mere agreement

- Require a grant by the state

- Can exist only for lawful purposes

Right of succession:

- Share of stock is transferable

- Can continue to exist despite the circumstances of the stockholders

- 50 years life, renewable, becomes indefinite

Powers, attributes and properties:

- Can only exercise powers expressly

authorized by the Corporation Code, its

By-laws and other special laws

- Can exercise incidental powers inherently

necessary for its existence and objectives

Ownership interest:

- Represented by share capital divided into

several shares of stock

- Any person buying a share capital

becomes a part owner called “stockholder”

- Stockholder is liable only to the extent of

his subscription

Managed by a board of directors:

- BOD is the group of stockholders managing

the corporation

- At least 5 natural persons, not exceeding 15

- Only the BOD and other authorized officers

can bind the corporation into contracts

ADVANTAGES OF A

CORPORATION

1. Legal capacity to act as a legal entity

2. Limited liability of stockholders

3. Continued life existence

4. Transferability of shares

5. Centralized management

6. Shareholders are not general agents

7. Greater source of funds

DISADVANTAGES OF A

CORPORATION

1. Complicated in formation and management

2. Greater degree of government control and

supervision

3. High cost of formation and operation

4. Heavier income tax

5. Subservient minority shareholders

6. Management and control separate from

ownership

7. Transferability of shares

CLASSES OF CORPORATION

1. Stock corporations – share capital are

divided into shares and are authorized to

distribute to shareholders dividends on

the basis of shares held

2. Non-stock corporations – no part of its

income is distributable as dividends

OTHER CLASSES OF

CORPORATION

1. As to number of persons

a. sole corporation

b. aggregate corporation

2. As to nationality

a. domestic corporation

b. foreign corporation

c. multinational corporation

OTHER CLASSES OF

CORPORATION

3. As to purpose

a. government corporation (public,

GOCC)

b. privately owned corporation (civil,

eleemosynary, ecclesiastical)

c. quasi-public corporation

OTHER CLASSES OF

CORPORATION

4. As to legal right

a. de jure corporation

b. de facto corporation

5. As to extent of membership

a. open corporation

b. close corporation

OTHER CLASSES OF

CORPORATION

6. As to relations to other corporations

a. parent or holding corporation

b. subsidiary corporation

COMPONENTS OF A

CORPORATION

1. Incorporators

2. Corporators

3. Shareholders or members

4. Subscribers

5. Promoters

6. Underwriters

Classes of Shares in General

Par Value Shares

No-par Value Shares

Voting Shares

Non-voting Shares

Ordinary Shares

Preference Shares

Promotion Shares

Treasury Shares

Convertible Shares

RIGHTS OF SHAREHOLDERS

1. Right to ownership and transfer of shares

2. Right to vote

3. Right to profit

4. Right to inspect financial statements

5. Right to corporate assets

STAGES IN ORGANIZING A

CORPORATION

1. Promotion

2. Incorporation

3. Formal organization and commencement

of business

PROMOTION INVOLVES:

1. Issuing of prospectus

2. Procuring subscriptions from prospective

investors

3. Securing a corporate charter

PROCESSES OF

INCORPORATION

1. Registration of corporate name with SEC

2. Drafting/execution of Articles of Incorporation

3. Execution of sworn affidavits and bank deposit certificate

4. Payment of filing and publication fees

5. Issuance of Certificate of Incorporation

FORMAL ORGANIZATION

Requires adoption of By-laws and election

of BOD/BOT and of officers

Includes taking steps necessary to

transact business and accomplish purpose

FORMAL ORGANIZATION

Shareholders/stockholders are the owners

of the business from which BOD are

elected

BOD members are policy makers and

exercise corporate powers

Procedure

Time to

Complete Associated Costs

Verify and reserve the company name with the Securities and Exchange Commission (SEC)

The company can verify the availability of the company name online. Verification is free but

reservation of the name, once approved by the SEC, costs PHP 40 for the first 30 days. The

company name can be reserved for a maximum of 120 days for a fee of PHP 120, which is

renewable upon expiration of the period. 1 day PHP 40

Deposit paid-up capital in the Authorized Agent Bank (AAB) and obtain bank certificate of

deposit

The company is required by law to deposit paid-up capital amounting to at least 6.25% of the

authorized capital stock of the corporation. This paid-up capital must not be less than PHP 5,000.

Some banks charge a fee for issuance of the certificate of deposit. 1 day No cost

Notarize articles of incorporation and treasurer's affidavit at the notary

According to Sections 14 and 15 of the Corporation Code, articles of incorporation should be

notarized before filing with the SEC. 1 day PHP 500

Register the company with the SEC

The company can register online through SEC i-Register but must pay on site at the SEC. The

following documents are required for SEC registration:

a. Company name verification slip;

b. Articles of incorporation (notarized) and by-laws;

c. Treasurer's affidavit (notarized);

d. Statement of assets and liabilities;

e. Bank certificate of deposit of the paid-in capital;

f. Authority to verify the bank account;

g. Registration data sheet with particulars on directors, officers, stockholders, and so forth;

h. Written undertaking to comply with SEC reporting requirements (notarized); and

i. Written undertaking to change corporate name (notarized).

The SEC Extension Office charges a handling fee of PHP 30 to cover the cost of transmitting the

documents to the SEC Head Office in Metro Manila. 5 days

PHP 2,695 (PHP 1,667.99

filing fee equivalent to 1/5 of

1% of the authorized capital

stock or the subscription price

of the subscribed capital stock,

whichever is higher but not

less than PHP 1,000 + PHP

16.68 legal research fee (LRF)

equivalent to 1% of filing fee

but not less than PHP 10 +

PHP 500 By-laws + PHP 150

for registration of stock and

transfer book (STB) required

for new corporations + PHP

320 STB + PHP 10 registration

for SEC bulletin + PHP 30

handling fee)

CORPORATE OFFICERS

1. President – must be a director

2. Vice-President

3. Secretary

4. Treasurer

Org Chart

COMMENCEMENT OF BUSINESS

Should be within 2 years from incorporation, failure to do so means dissolution and stopping of corporate powers

If commenced and then inoperative for at least 5 years, the same is a ground for suspension/revocation of certificate of incorporation

ARTICLES OF INCORPORATION

Basic instrument by which a corporation is formed under the corporation law, executed by several persons as incorporators and filed in a designated public office such as the SEC as evidence of corporate existence.

Contents are provided in Sec. 14 of the Corporation Code

PRE-INCORPORATION

SUBSCRIPTION REQUIREMENT

1. Sworn statement of the Treasurer of the

25% subscription of authorized capital

stock

2. At least 25% of subscription has been

fully paid, which should not be less than

P5,000

CORPORATE BY-LAWS

Are regulations, ordinances, rules or laws

adopted by the corporation for its

government.

Contents are found in Sec. 47 of the

Corporation Code

Pro-forma AI and BL

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BOOKS AND RECORDS

Sec. 74 of the Corporation Code provides that stock or non-stock corporation should keep in its principal office the following:

1. Minutes book

2. Stock and transfer book

3. Books of accounts

4. Subscription book

5. Shareholders’ ledger

6. Subscribers’ ledger

7. Share certificate book

FORMS OF BUSINESS

Corporation Partnership Sole

Proprietorship

Owners At least 5 2 or more Only 1

Ownership

account

Share capital Partner’s

capital

Owner’s

capital

Equity section

of B/S Shareholder’s

equity Partner’s

capital

Owner’s

capital

I/S closed to Accumulated

P/L (R/E) Partner’s

capital

Owner’s

capital

CORPORATION

ACCOUNTING

Share Capital

SHAREHOLDERS’ EQUITY

Residual interest of the shareholders in the assets of the corporation after deducting liabilities

Formula:

Total assets XXX

Less: Total liabilities XXX

Shareholders’ equity XXX

ELEMENTS OF SHAREHOLDERS’

EQUITY

3 Subsections:

1. Total share capital

2. Other reserves

3. Accumulated profits/losses (Retained

earnings)

A. TOTAL SHARE CAPITAL (Total

Capital Stock)

1. Share capital (Capital stock)

2. Subscribed share capital

3. Subscriptions receivable (deduction from

Subscribed share capital or part of

current assets if due within 1 year)

4. Treasury shares (deduction from total

Shareholders’ equity)

B. OTHER RESERVES

1. Appropriation reserve (R/E appropriated)

2. Additional paid-in capital (APIC)

a. Share premium (APIC in excess of par/stated value; APIC on treasury shares)

b. donated capital

c. equity share options issued

3. Revaluation surplus (revaluation increment)

4. Unrealized gains/losses on available for sale securities

5. Foreign currency translation differences

C. ACCUMULATED PROFITS

Retained earnings – unappropriated

SHARE CAPITAL (Capital Stock)

Elements:

1. Share capital – paid-in capital representing

amount of total par or stated value of shares

issued

- represents portion of authorized share capital

that has been fully paid

- may be par value share or no par value share

but with stated value


Par value

- Refers to a nominal peso amount assigned to

each equity share by the company’s charter.

- Face value of the shares appearing on the

certificate.

- The fixed amount assigned to each equity share.

- In the Philippines, it is prohibited to issue shares

of stock at an amount below par value.


Stated value

- BOD can arbitrarily select an amount for its stock in the absence of par value in the charter

- Serves same purpose as par value, although not printed in the share certificate.

- Issued price may vary from time to time, fixed based on share’s book value, but cannot be issued below P5 per share

- Primary advantage: can be issued at any price without a discount liability.


2. Subscribed share capital

- Portion of share capital that an investor

agreed to purchase.

- Not yet issued because may only be

partially paid

- added to share capital


3. Subscriptions receivable

- refers to unpaid portion of SSC

- usually treated as deduction from SSC

except when collectible within 1 year

which may be classified as part of current

asset


4. Treasury share

- Issued shares reacquired by the issuing

corporation

- Treated as a reduction from total

shareholders’ equity

NATURE OF SHARE CAPITAL

The capital or principal fund of a corporation from the contribution of subscribers or sale of corporate-owned shares.

Shareholders’ ownership interest

Owning at least 1 share makes one a shareholder or part owner

Corporation can issue upon SEC registration

Can be ordinary shares (common stock) and preference shares (preferred stock)

MAJOR CLASSIFICATIONS OF

SHARE CAPITAL

1. Ordinary share (common stock)

- basic interest of ownership

- if there is only 1 class of stock issued

- holders receive same privilege and rights,

assume greater risks but with greater control

and may be greater reward in dividends and

capital appreciation, have voting rights and can

be voted as part of BOD

MAJOR CLASSIFICATIONS OF

SHARE CAPITAL

2. Preference share (preferred stock)

- separate class according to the corporate by-laws with preference to dividends and/or assets over ordinary shares

- have fixed dividend percentage based on par value

- according to law, may be issued only with a stated par value

- holders have no voting rights and cannot be voted upon as part of BOD

- cannot be issued alone without ordinary share although ordinary share can be issued without preference share

CLASSIFICATION OF

PREFERENCE SHARE CAPITAL

1. Cumulative preference shares

2. Noncumulative preference shares

3. Participating preference shares

4. Nonparticipating preference shares

5. Convertible preference shares

6. Redeemable or callable preference

shares

CLASSIFICATION OF


1. Cumulative preference shares

- the right of preferred shareholders to

receive dividend in arrears (undeclared

dividends in previous years) is given

priority before paying common

shareholders

CLASSIFICATION OF


2. Non-cumulative preference shares


receive dividend in arrears is lost and he

is entitled to receive only the current

year’s declared dividend

CLASSIFICATION OF


3. Participating preference shares


receive additional dividend after the

dividend for both ordinary and preferred

shares are paid

CLASSIFICATION OF


4. Non-participating preference shares

- the preferred shareholders are not

entitled to receive additional dividend,

only the dividends declared during the

current year, while excess dividends are

all distributed to ordinary shareholders

CLASSIFICATION OF


5. Convertible preference shares

- the preferred shareholders are given

the option to convert their shares into

ordinary shares or some other securities

of the investee corporation

CLASSIFICATION OF


6. Redeemable or Callable preference

shares

- the issued preference shares can be

bought back by the issuing corporation

with a specific call or redemption price

OTHER CLASSIFICATIONS OF

SHARE CAPITAL

Ordinary or preference shares can be classified according to the purpose for which they are issued or acquired:

1. Founders’ stock

2. Bonus Stock

3. Treasury Share

4. Promotion Stock

5. Donated Stock

6. Convertible Stock

7. Watered Stock

OTHER SHARE CAPITAL

CLASSIFICATIONS

Ordinary or preference shares can be classified according to the purpose for which they are issued or acquired:

1. Founders’ stock – equity share given to incorporators with certain privileges on dividends and voting rights not enjoyed by ordinary incorporators (subject to SEC approval and 5-year limitation of exercise)

OTHER SHARE CAPITAL

CLASSIFICATIONS

2. Bonus stock (Stock warrant) – equity share given as a premium to encourage sale of another class of securities (like bonds)

3. Treasury stock – equity share that has been issued to shareholders as fully paid and subsequently reacquired by the corporation

OTHER SHARE CAPITAL

CLASSIFICATIONS

4. Promotion stock – equity share usually

issued as incentive or payment to those

who take the preliminary steps in

organizing the corporation

5. Donated stock – securities given to a

corporation by its own shareholders

commonly for resale

OTHER SHARE CAPITAL

CLASSIFICATIONS

6. Convertible stock – a preference share which may be exchanged for ordinary share or another security, usually of the same company, in accordance with the terms of the issue

7. Watered stock – an equity share that is issued by a corporation as fully-paid up share capital, when in fact the whole amount of the par value thereof has not been paid, as a result of overstatement of the value of consideration received

ACCOUNTING FOR SHARE

CAPITAL TRANSACTIONS

1. Authorization – involves recording of capital share upon approval by the SEC

2. Subscription – involves accounting for share capital assigned to potential shareholders who agreed to pay a consideration in the future

3. Issuance – involves accounting for share capital upon full payment of subscribed capital shares

4. Reacquisition – involves accounting for acquisition and retention of corporation’s own equity shares previously issued

5. Retirement – involves accounting for acquisition and retirement of the corporation’s own share capital

MEMORANDUM METHOD

Journal Entries:

1. Authorization

(memo entry in the general ledger only)

2. Subscriptions

Subscription receivable XXX

Subscribed share capital XXX

MEMORANDUM METHOD

3. Issuance of share certificate


Share capital XXX

4. Reacquisition

Treasury share XXX

Cash XXX

5. Retirement of treasury share

Share capital XXX

Treasury share XXX

JOURNAL ENTRY METHOD

Journal Entries:

1. Authorization

Unissued share capital XXX

Authorized share capital XXX

2. Subscriptions

Subscription receivable XXX


MEMORANDUM METHOD

JOURNAL ENTRIES

3. Issuance of share certificate


Unissued share capital XXX

4. Reacquisition

Treasury share XXX

Cash XXX

5. Retirement of treasury share

Share capital XXX

Treasury share XXX

AUTHORIZATION OF SHARE

CAPITAL

The maximum authorized number of

shares multiplied by the par value per

share is called authorized share capital.

A decrease or increase in ASC requires

amendment of AOI and SEC approval.

AUTHORIZATION OF SHARE

CAPITAL

Example:

Assume that Big Dreams Corporation was

authorized to issue 10,000 ordinary shares at

par value of P100 per share.

Journal Entry Method:

Unissued Ordinary Shares P1,000,000

Authorized Ordinary Shares P1,000,000

Memorandum Method:

Memo entry: The company was authorized to issue P1,000,000

ordinary shares, divided into 10,000 shares, with P100 par value.

SHARE SUBSCRIPTIONS

Share subscription – a written contract by

which one engages to take and pay for the

share capital of a corporation at some

future date.

- Once perfected, subscriber becomes

bound to buy the shares.

SHARE SUBSCRIPTIONS

Example:

Assume that the incorporators of Big Dreams Corporation subscribed to the 25% of authorized share capital of P1,000,000 at par value of P100 per share and paid the 25% of the subscribed share capital.

To record the subscription:

Subscriptions receivable 250,000

Subscribed ordinary shares 250,000

To record the cash collection:

Cash 62,500


ISSUANCE OF SHARE CAPITAL

FOR CASH RECEIVED

Example:

Based on the preceding example, assume that 80% of the P250,000 total subscribed share capital is fully paid.

Cash 137,500


Journal Entry Method:

Subscribed ordinary share 200,000

Unissued Ordinary share 200,000

Memorandum Method:

Subscribed ordinary share 200,000

Ordinary share 200,000

ISSUANCE OF SHARE CAPITAL

FOR CASH RECEIVED

Assume that additional 500 ordinary shares

are issued for cash of P120 per share

(above par):

Cash 60,000

Ordinary Shares 50,000

Share premium 10,000

accounting for corporation

Documents