INTRODUCTION TO CORPORATION ACCOUNTING

Corporation an artificial being created by operation of law having

the rights of succession and the power, attributes and properties
expressly authorized by law or incident to its existence.

Characteristics of a Corporation

1. Separate legal entity A corporation is an artificial being with a

personality separate from that of its individual owners.

2. Created by operation of law A corporation is generally created

by operation of law. The mere agreement of the parties cannot
give rise to a corporation.

3. Rights of succession A corporation continues to exist

notwithstanding the withdrawal, death, insolvency or incapacity
of the individual owners. Changes in the ownership structure do
not dissolve a corporation.

4. Powers, attributes, properties expressly authorized by law

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

5. Ownership divided into shares Proprietorship in a corporation is

divided into units known as shares of stocks.

6. Board of Directors (BOD) Management of the business is vested

in a board of directors elected by the stockholders. The BOD is
the governing body or decision-making body of the corporation.

Comparison between Partnership and Corporation

Partnership Corporation
Formed by 2 persons. Formed by 5 persons

Starts with agreement among Starts with the issuance of a

partners; may be formed orally. certificate of incorporation
issued by SEC

Unlimited liability Limited liability

Limited life Unlimited life

Transfer of equity of a partner Shares can be transferred from

needs the consent of other one shareholder to another
partners. without getting the consent of the

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 other shareholders.

Partner is an agent of the Shareholders do not act as agents

partnership. of the corporation.

Advantages of a Corporation

1. The corporations power of succession enables it to enjoy a

continuous existence.

2. The continuity of corporate existence enables it to obtain a

strong credit line.

3. Bigger source of capital may be raised because many individuals

invest funds in the corporation.

4. Shareholders enjoy limited liability. Their liability to corporate

debts extends only to their investment in the corporation.

5. Shares of stocks may be transferred without the consent of the

other shareholders.

Disadvantages of a Corporation

1. It is not easy to form because of complicated legal and

documentary requirements.

2. The limited liability of the shareholders weakens or limits its

credit capacity.

3. It is subject to more governmental requirements.

4. There is possibility of abuse of power by the Board of Directors.

5. It is subject to more taxes.

Types of Corporation

1. Public a corporation formed to render government service

2. Private a corporation formed for a private purpose, aim or

benefit.

3. Quasi-public a private corporation which is given a franchise to

perform functions of a public character.

4. Domestic a corporation that is organized under Philippine laws.

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 5. Foreign - a corporation that is organized under the laws of other
countries.

6. Stock a corporation in which the capital is divided into shares of

stock and is authorized to distribute dividends to the holders of
such shares. A stock certificate is a physical evidence of the
shares of stock. Stock corporations are generally profit-oriented.

7. Non-stock - a corporation in which capital comes from fees or

contributions given by individuals. No part of its income is
distributed as dividends and any profit shall be used to further
the purpose(s) of the corporation. Non-stock corporations are
generally non-profit in nature.

8. Open a corporation whose ownership is widely held by many

investors.

9. Closely held or family a corporation in which 50% or more of its

stock is owned by five persons or less.

Components of a Corporation

1. Incorporators persons who originally formed the corporation

and whose names appear in the Articles of Incorporation. They
must be 5 but not more than 15 natural persons. They should
not artificial persons.
2. Stockholders or shareholders owners of a stock corporation.

3. Members persons who gave fees or contributions to a non-

stock corporation.

4. Corporators persons who compose the corporation whether as

stockholders or members.

5. Promoters persons who undertake the necessary steps and

procedures to organize the corporation.

6. Subscribers persons who agreed to buy shares of stock but will

pay at a later date.

7. Underwriters persons who undertake to sell the shares of

stocks to the general public.

Organizing a Corporation

The process of organizing a corporation consists of three stages:

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 1. Promotion makes preliminary arrangements and solicits
subscription to raise sufficient capital for the business.

2. The following are the pre-incorporation requirements:

o At least 25% of the authorized share capital must be

subscribed.

o At least 25% of total subscriptions must be paid.

3. Incorporation formalizes organization of the corporation by filing

with SEC the necessary documentary requirements such as articles
of incorporation and treasurers affidavit attesting compliance to the
pre-incorporation requirements. Upon approval, SEC issues a
certificate of incorporation, the date of which is considered as
the date of registration or incorporation.

4.Commencement of the business the business should start its

business within two years from the date of incorporation.

Costs incurred in connection with the formation of the corporation are

recorded as expense. Examples of organization costs are filing fees,
cost of printing stock certificates, promoters commission and legal
fees. The following account titles may be used in recording
organization costs:

Pre-operating Costs
Pre-operating Expenses
Organization Expense
Organization Costs

Articles of Incorporation

The Articles of Incorporation enumerates the powers and

limitations conferred upon the corporation by the government.
It includes the following information:

1. The name of the corporation;

2. The purpose or purposes for which the corporation is formed;
3. The place of the principal office of the corporation;
4. The term of existence of the corporation, not exceeding 50 years;
5. The names, nationalities and addresses of the incorporators;

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 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 shares to be issued
and the number of each class of share indicating the par value if
there is any;
8. The amount of subscription to the share capital , the names of
the subscribers and the number of shares subscribed by each;
9. The total amount paid on the subscriptions and the amount paid
by each subscriber on his subscription.

By-Laws

The by-laws of a corporation contain provisions for the internal

administration of the corporation. The by-laws should be filed
within one month from the date of issuance of the certificate of
incorporation. The by-laws normally include the following:
1. The date, place and manner of calling the annual shareholders
meeting;
2. The manner of conducting meetings;
3. The circumstances which may permit the calling of special
meetings of the shareholders;
4. The manner of voting and the use of proxies;
5. The manner of electing the directors;
6. The term of office of the directors;
7. The authority and duties of the directors;
8. The manner of selecting the corporate officers;
9. The procedures for amending the articles of incorporation and
by-laws.

Corporate Books and Records

The corporation generally maintains the following books of accounts and

records:

1. Journals and Ledgers;

2. Minute books for meetings of shareholders;
3. Minute books for meetings of Board of Directors;
4. Stock and Transfer Book - contains records of all stocks, names
of stockholders, amount paid and unpaid, any sale or transfer of
stock.

Kinds of Shares

1. Par Value a share of stock that is given a definite or fixed value

in the articles of incorporation.

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 2. No Par Value a share of stock that has no fixed value; it may
not be issued for less than P5.

3. Common or Ordinary shares the basic issue of shares. The

common or ordinary share entitles the holder to the following
basic rights:

a. Right to vote in shareholders meeting;

b. Right to share in corporate profits (dividends);
c. Right to share in corporate assets upon liquidation;
d. Right to purchase additional shares of stocks in the event
that the corporation increases its share capital (pre-
emptive right).

4. Preferred or Preference share - entitles the holder to some

specific preferences over the common or ordinary share such as

a. Preference as to payment of dividends;

b. Preference as to distribution of assets upon liquidation.
Terms Peculiar to a Corporation
1. Authorized shares refers to the maximum number of shares
which a corporation may issue (as set forth in the Articles of
Incorporation).
2. Issued shares shares which are issued to shareholders which at
present may or may not be in the hands of the shareholder.
3. Unissued shares shares which have never been issued and are
available for issuance.
4. Outstanding shares shares of stocks issued to shareholders or
subscribers whether fully or partially paid except for treasury
shares.
5. Treasury shares - shares which have been issued and fully paid
for but subsequently reacquired by the issuing corporation.
6. Subscribed shares shares which investors have contracted to
acquire.

SAMPLE EXERCISES: ACCOUNTING FOR SHARE CAPITAL

TRANSACTIONS

1. ABC Corporation was organized on February 1, 2017 with authorized share capital
of 20,000 shares with a P50 par value.
Feb 1 The incorporators subscribed 25% of the authorized share
capital paid 25% of the total subscriptions.
15 Collected from the incorporators 50% of the balance of
their subscriptions.
28 Collected the remaining balance of the incorporators
subscriptions.

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Date Particulars Debit Credit
Feb Authorized to issue 20,000
1 shares at P50 par value

1 Cash 250,000
Subscriptions Receivable 750,000
Subscribed Share 1,000,000
Capital
To record subscriptions of
incorporators

15 Cash 375,000
Subscriptions 375,000
Receivable
Collected 50% of the
subscription balance.

28 Cash 375,000
Subscriptions 375,000
Receivable
Collected the subscription
balance in full.

28 Subscribed Share Capital 1,000,000

Share 1,000,000
Capital
Issued stock certificates

2. NOTE: Par Value: P50

Jan 2 Issued 1,000 shares to an investor in exchange for equipment

valued at P50,000
12 Issued 500 shares for P25,000..
15 Sold 3,000 shares at P50 per share. Land with the same value
was received .

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Date Particulars Debit Credit

Jan 2 Equipment 50,000

Share Capital 50,000
Issued 1,000 shares

12 Cash 25,000
Share Capital 25,000
Issued 500 shares

15 Land 150,000
Share Capital 150,000
Issued 3,000 shares

January 2017