Unit 1 and 2 Nature and Formation of a Partnership

A partnership is a contract whereby two or more persons bind themselves to contribute money, property or industry into a common fund with the intention of dividing the profit among themselves (Article 1767 of the Civil Code of the Philippines). This joint effort may be supported by a partnership agreement known as the Articles of Co-Partnership, which is an agreement in writing among the partners governing the nature and terms of the partnership contract. A written agreement is required when partnership capital is P 3,000 or more in money or in property. The Article of Co-partnership helps in avoid misunderstanding among the partners. The written agreement among the partners governs the formation, operation and dissolution of the partnership and is required to be registered with SEC. The Article of Co-partnership contains the following information: 1. The name of the partnership; 2. The names, addresses of the partners, classes of partners stating whether the partner is a general or a limited partner; 3. The effective date of the contract; 4. The purpose and principal place of business of the business; 5. The capital of the partnership stating the contributions of each of the partners; 6. The rights and duties of each of the partners; 7. The manner of dividing profit or loss among the partners; 8. The conditions under which the partners may withdraw money or other assets; 9. The manner of keeping the books of accounts; 10. The causes for dissolution and the provision for arbitration in settling disputes.

Characteristics of a Partnership
1. Based on contract – partnership is formed through the mutual agreement of all the partners. The contract may be written or oral. 2. Voluntary association – no one should be forced or coerced in joining a partnership. 3. Mutual agency – any partner may act as an agent of the partnership in conducting its affairs. 4. Limited life – a partnership may be dissolved at any time by action of the partners or by operation of law. The withdrawal, death, retirement, bankruptcy, incapacity of a partner and the admission of a new partner dissolves the partnership. 5. Unlimited liability – the personal assets of a general partner may be used to satisfy the claims of the creditors of the partnership if the partnership assets are not enough to settle the liabilities to outsiders upon liquidation. 6. Co-ownership of property – properties contributed to the partnership are owned by the partnership. Properties invested by a partner cease to be his own personal property.

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7. Co-ownership of profit – a partner has the right to share in partnership profits. The partners are entitled to share in the firm’s profits as a return on their investment. 8. Legal entity – a partnership has a legal personality separate and distinct from that of each of the partners. 9. Income tax – partnerships are subject to income tax rate of 30% beginning the fiscal year 2010 with the exception of general professional partnerships (i.e., those partnerships organized for the exercise of professions, e.g., CPAs, doctors, lawyers, etc.)

Advantages of a Partnership
1. It is easy and inexpensive to form and to dissolve. It may be created orally except when partnership capital is P3,000 or more. A partnership is ended whenever there are changes in the ownership structure such as withdrawal of a partner or admission of a new partner. 2. Greater amount of capital may be raised compared to a sole proprietorship. The combined capital of 2 or more partners offers a greater source of capital. 3. There is relative freedom and flexibility in decision-making compared to a corporation. Decisions are effected simply by agreement among the partners without the formalities necessary under a corporation. 4. It is better managed because more than one person supervises business affairs. Better management results from the combined experience and ability of several individuals. 5. The unlimited liability of general partners makes it reliable from the point of view of creditors.

Disadvantages of a Partnership
1. There is lack of business continuity because it can be easily dissolved. 2. Limited amount of capital may be raised compared to a corporation. 3. The unlimited liability of a partnership deters many from joining in a partnership form of business. 4. A general partner may be subjected to a personal liability for erroneous management decisions made by his associates. 5. There is likelihood of dissension and disagreement when each of the partners has the same authority in the management of the firm. 6. There is difficulty in transferring ownership interest because ownership interest in the partnership cannot be transferred without the consent of all the partners.

Kinds of Partnerships
1. According to activities a. Service – main activity is the rendering of services b. Merchandising or Trading – main activity is the purchase or sale of goods c. Manufacturing – main activity is the production of goods

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2. According to liability a. General – one wherein all the partners are general partners who are liable for the partnership debts to the extent of their personal property after all the partnership assets have been exhausted. b. Limited – one consisting of one or more general partners and one or more limited partners. 3. According to object a. Universal partnership of all present property – one in which the partners contribute all the property which actually belong to each of them, at the time of the constitution of the partnership, to a common fund with the intention of dividing the same among them as well as the profits which they may acquire therewith. All assets contributed to the partnership and subsequent acquisitions become common partnership assets. b. Universal partnership of profits – one which comprises all that the partners may acquire by their industry or work during the existence of the partnership and the usufruct of movable or immovable property which each of the partners may possess at the time of the institution of the contract. The original movable or immovable property contributed do not become common partnership assets. c. Particular partnership – one which has for its object determinate things, their use or fruits or a specific undertaking or the exercise of a profession of vocation. 4. According to duration of partnership existence a. Partnership at will – one for which no term is specified and is not formed for a particular undertaking or venture and which may be terminated any time by mutual agreement of the partners or the will of one alone. b. Partnership with a Fixed Term – one in which the term or period for which the partnership is to exist is agreed upon (Baysa and Lupisan, 2000).

Kinds of Partners
1. According to contribution a. Capitalist – one who contributes capital in money or property. b. Industrial – one who contributes industry, labor, skill or service c. Capitalist-Industrial – one who contributes money, property and industry According to Liability a. General – one whose liability to third persons extends to his private property b. Limited – one whose liability to third persons is limited only to the extent of his capital contribution to the partnership. According to management a. Managing Partner – one who manages actively the business of the partnership b. Silent – one who does not participate in the management of partnership affairs.

2.

3.

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4.

Others a. Nominal- a partner in name only. b. Secret – one who takes active part in the business but whose connection with the partnership is concealed on unknown to the public. c. Dormant partner – one who does not take active part in the business and is not known to the public as a partner.

Basic Features of Partnership Accounting
1. More than one capital and drawing accounts – there will be as many capital accounts and as many drawing accounts as there are partners 2. Partner’s loans – partners may advance money to the partnership in the form of loans when the business is in need of additional funds. The account title to be credited is Loans Payable to Partner or Partner, Loan 3. Partner’s borrowings – the partnership may advance money to partners other than withdrawals in the form of loans. The account title to be debited is Receivable from Partner. 4. Partner’s salaries – partners are paid salaries for services rendered in the conduct of partnership business. 5. Interest on investment – interest is allowed to earn on the asset investment of the partners. 6. Division of profit and losses – net profit or net loss is to be divided among the partners based on their agreement.

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PARTNERSHIP FORMATION
Two Kinds of Partnership Formation
1. Two or more individuals form a business for the first time.
DATE PARTICULARS Cash investment July 1 Cash Rose, Capital To record initial investment. Investment in the form of non-cash assets July 1 Non-cah assets Rose, Capital To record initial investment. Note: Fair market value of the non-cash asset is used in recording the investment. Investment in the form of non-cash assets with assumption of liability July 1 Non-cah assets Liability Rose, Capital To record initial investment. Note: Fair market value of the non-cash asset is used in recording the investment; credit the applicable liabilily account using the loan balanceto be assumed by the partnebrship; and credit the capital account of the partner using the net amount (I.e., non cash assets - liability). Investment in the form of service or industry Memorandum entry: Guada is admitted as an industrial partner with ____ share in profits. P/R D E B I T X X X X X X X X X X C R E D I T

X X X X X X X X X X

X X X X X X X X X X X X X X X

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DEBIT X X X X X X X X X X X X X X X X X CREDIT Date PARTICULARS P/R To record the investment of the sole proprietor All assets from the original business Allowance for doubtful accounts All liabilty accounts Rose. a. the said account must be recorded at gros amount and the allowance for doubtful accounts is carried over in the new set of partnership books. PARTICULARS All contra asset accounts All liability accounts Rose. Note 3: Other partners' investment are recorded in the same way as in No. Capital Decrease in the asset value with no contra-asset account Rose. Capital Note 1: If the sole proprietor assets includes Accounts Receivable.2. Adjust the existing books of the sole proprietorship(s). The only difference is that the Capital account replaces all the nominal accounts . Note 2: Depreciable assets are recorded in the new set of partnership books at their net cvarrying value.. Capital Decrease in the asset value with contra-asset account Rose. Date PARTICULARS Increase in the asset value with no contra-asset account Asset Rose. An individual forms a business with a sole proprietor or a sole proprietorship(s) converted into a partnership The following are the accounting procedures in converting a sole proprietorship form of business into partnership.e. Capital Contra-asset P/R DEBIT X X X X X X X X CREDIT X X X X X X X X X X X X X X X X X X X X X X X X Note: These adjusting entries are similar to year-end adjustments. Date Close the existing books of the sole proprietorship(s). 1 (Formed by individulas) Marivic Valenzuela-Manalo . Capital Asset Increase in the asset value with contra-asset account Contra-asset Rose. b. accumulated depreciation account is not recorded in the partnership books . Record the investment of all the partners in the new set of partnership books. Capital All asset accounts P/R DEBIT X X X X X X X X X X X X CREDIT X X X X X c. i.

Date PARTICULARS July 1 Receivable from Partner Cash P/R DEBIT X X X X CREDIT X X X X 3. Recording and posting reversing entries However. loan or Loan Payable to Partner P/R DEBIT X X X X CREDIT X X X X 2. the entry is to debit Accounts receivable and credit the Sales account which is the same as that of a sole proprietorship In fact the Accounting Cycle of a Partnership is similar to that of sole proprietorship: 1. Recording of the business transactions 2. Prepare financial statements 7. Preparing a trial balance 4. Recording adjusting entries 6. Posting to ledgers 3. drawing accounts are closed to the capital accounts only if agreed upon in the articles of co-partnership. problems distinctive only to partnership operations are encountered in the following: 1. Purchase of supplies is debited either to Supplies or Supplies Expense account and when merchandise are sold on account. Recording and posting closing entries 8. Recording of the closing entries of a partnership/Dividing partnership profits or losses– individual drawing accounts of partners are not automatically closed to their capital accounts in order to maintain the original capital balances of the partners as stated in the Articles of Co-Partnership. Recording of partner’s loan account when a partner lends money to a partnership. Recording of loan extended by the partnership to the partner/s.Unit 3 Accounting for Division of Profits & Losses Partnership Operations Accounting for a partnership form of business is basically similar to that of a sole proprietorship. Preparing a post-closing trial balance 9. For example. Preparing the worksheet 5. Date PARTICULARS July 1 Cash Partner. Marivic Valenzuela-Manalo 1 .

The various income ratios that may be used include: a. A ratio based either on capital balances at the beginning of the year or on average capital balances during the year. a. c. Salaries to partners and the remainder on a fixed ratio.a. expressed as a proportion (6:4). Statement of Financial Position – the owner’s equity section is labeled Partners’ Equity Marivic Valenzuela-Manalo 2 . 4. Salaries to partners. interest on partners' capitals. Closing entries for a partnership are identical to the entries made for a proprietorship. Preparation of financial statements . and the remainder on a fixed ratio.the financial statements prepared for a partnership form of business is basically the same as sole proprietorship except for the following: a. except for the use of multiple capital and drawing accounts. drawing Guada. Provisions for salaries and interest must be applied before the remainder of net income or net loss is allocated on the specified fixed ratio. A partner's share of net income or net loss is recognized in the accounts through closing entries. 31 Income Summary Rose. b. 31 Rose. The objective is to reach agreement on a basis that will equitably reflect the differences among partners in terms of their capital investment and service to the partnership. drawing Guada. a percentage (70% and 30%). or a fraction (2/3 and 1/3). Distributing net income Date PARTICULARS Dec. A fixed ratio. e. Detailed information concerning the division of net income or net loss should be shown at the bottom of the income statement. drawing P/R DEBIT X X X X CREDIT X X X X X X X X a. drawing Income Summary P/R DEBIT X X X X X X X X CREDIT X X X X Partnership net income or net loss is shared according to the partners’ capital ratio unless the partnership contract specifically indicates otherwise. Interest on partners' capitals and the remainder on a fixed ratio. d. b. Distributing net loss Date PARTICULARS Dec.

Plant and Equipment Total Assets P 3 78. Capital Total Labilities and Partners' Equity P 5 P 178.000 154.000 Marivic Valenzuela-Manalo 3 .000 492.000 4 P Liabilites and Partners' Equity Current liabilites Trade and other payables Long term liabilities Mortgage Payable Total liabilities Partners' Equity Rose.000.000 63.000.000 1.000 80.000 P 208. Capital Guada. 20X5 Assets Note Current assets Cash Investment in Trading Securities Trade and other receivables Merchandise Inventory Prepaid expenses Property.000 505.000 P 495.RGem Trading Statement of Financial Position December 31.000 1.000 314.000 120.125 P 508.875 299.

125 324.400 78.875 55.875 Guada 250.000 Distribution of Net Income Rose Annual salary to managing partner P 60.125 P P Total 60.Income Statement – an additional section called Distribution of Net Income or Net Loss is included.475 Net Income P 113. 25/40) 29.125 Total 400.125 74.400 Balance: capital ratio (15/40.875 263.000 c.000 508.000 10% interest on beginning capital 15.000 588. Each partner is provided a column heading which explains details of the changes in his/her equity account.000 74.000 P 114.500 102.000 299.000 80.500 P 217. 20X5 Rose 150.000 49. RGem Trading Statement of Changes in Partners' Equity For the year ended December 31.000 475.000 113. January 1 Add: Net Income Sub-total Less: Drawings Capital balances P P P P P P P P P Marivic Valenzuela-Manalo 4 .000 208.000 40.875 Guada P 25.000 9.b. 20X5 Note 1 2 Net Sales Revenue Cost of Sales Gross profit Operating Expenses General and administrative expense Distribution expense Net income P P 880.000 405. This profit or loss distribution provides a full analysis of the distribution of earnings or losses which is presented at the bottom part of the partnership income statement.000 188.000 5% bonus based on net income 9. RGem Trading Income Statement For the year ended December 31. Statement of Partners’ Equity – a statement that reports the changes that have taken place in the partners’ equity during the period.000 Capital balances.600 188.125 25.000 188.

and entrepreneurial ability or the partner’s personal business contacts and his credit rating in the business community. In the absence of any agreement as to the division of profits or losses. the following scheme may be adapted since the partnership’s net income may be viewed as a return for: 1. And if profits or losses are to be divided fairly and equitably these contributions by the partners must be properly considered. 3. experience or time devoted by a partner to the business. The income of the partnership is realized as the result of combining the contribution of the partners in terms of capital investment. the Philippine Partnership Law provides that the share of each partner in the profit or loss shall be in proportion to what he has contributed.Capital Account of a Partner Rose. This is the ratio in which partnership profits and losses are divided and must be stated in the Articles of Co-Partnership. services rendered or time devoted in the management of the business. The law also provides that if the sharing of profits has been agreed upon by the partners. services rendered – provide salaries to give recognition to the ability. Marivic Valenzuela-Manalo 5 .. But the distribution to individual partners of this profit or loss is the primary objective of the accounting process. Therefore. but no provision was made as to the distribution of losses. Capital Debit Credit Permanent Initial and additional withdrawals investments Rules for Dividing Profit and Loss in a Partnership business The computation of the result of business’ operation of a partnership is essentially the same as that of the sole proprietorship.e. The partnership may come up with their profit and loss ratio in the distribution of profits and losses of the firm. entrepreneurial ability or managerial skills . the share of each partner in the losses shall be divided in the same manner that profits are divided. 2. i.provide bonus which is an incentive or special compensation which is usually based on net income. capital investment – provide interest to give recognition to differences in the capital contribution given in proportion to the period such capital was actually used. but the industrial partner shall receive such shares as what is just and equitable under the circumstances. in accordance with the partners’ contributed capital.

Original/Initial investment b. Equally 2. Fractions b. Arbitrary Ratio a. Beginning capital balance c. Ending capital balance d. Based on Capital Ratio a.Methods of Dividing Net Income 1. Ratio and Proportion 3. Interest and Bonus – considered as part of the distribution of net income Marivic Valenzuela-Manalo 6 . Allowing Salaries. Average capital – most equitable method 4. Percentages c.

b. Reasons why a partnership may be dissolved 1. the existence of the partnership business may be somewhat uncertain since it depends on the personalities. Admission of a new partner 2. incapacity or insolvency of a partner 4. Incorporation of a partnership Admission of a New Partner 1. determining profit share of each partner from the last balance sheet date to dissolution date. 2. Retirement or withdrawal of a partner 3. Death. Dissolution of an old partnership may be followed by: 1. therefore. There is a need to update the capital balances of the partners by a. etc.Unit 4 PARTNERSHIP DISSOLUTION WITHOUT LIQUIDATION A partnership depends upon the contractual agreement between or among partners. A partnership is said to be liquidated when the business is terminated. Dissolution 1. 2. Marivic Valenzuela-Manalo 1 . The termination of the life of an existing partnership. revaluing/ adjusting partnership assets and liabilities using a temporary account called the Capital Adjustment account. A partnership is said to be dissolved when the original association for purposes of carrying on activities has ended. if the partners decide. Civil Code of the Philippines). Dissolution and liquidation in relation to partnerships are not synonymous. liquidation – termination of business activities and winding up of partnership affairs preparatory to going out of business. moods. The change in the relation of the partners caused by any partner ceasing to be associated in the carrying out of the business (Article 1825. The consent of all the partners is necessary. 2. Any events or happenings that cause the technical termination of a partnership may lead to a permanent dissolution or liquidation. relationships of partners. the formation of a new partnership – new partnership continues the business activities of the dissolved partnership without interruption.

drawing Guada. capital P/R DEBIT X X X X CREDIT X X X X X X X X X X X X X X X X X X X X X X X X b. Date PA RTICULA RS Dec.a. capital Guada. Revaluing/ adjusting partnership assets and liabilities Increase in value of an asset without a contra-asset account Date PA RTICULA RS P/R July 1 Asset Capital Adjustment DEBIT X X X X CREDIT X X X X Decrease in value of an asset without a contra-asset account Date PARTICULARS P/R July 1 Capital Adjustment Asset DEBIT X X X X CREDIT X X X X Increase in value of an asset with a contra-asset account Date PARTICULARS P/R July 1 Contra-asset Capital Adjustmnet DEBIT X X X X CREDIT X X X X Decrease in value of an asset with a contra-asset account Date PARTICULARS P/R July 1 Capital Adjustment Contra-asset DEBIT X X X X CREDIT X X X X Increase in value of a liability account Date PARTICULARS July 1 Capital Adjustment Liability P/R DEBIT X X X X CREDIT X X X X Marivic Valenzuela-Manalo 2 . 31 Income Summary Rose. drawing Guada. drawing Rose. drawing Rose. Determine profit share of partners.

Marivic Valenzuela-Manalo 3 . There is no increase in total assets and no increase in total partners’ equity. the partnership is dissolved and a new partnership is formed. c. The only difference is that. When a new partner is admitted. capital Guada. capital or Rose. By purchase of interest from one or more of the old partners a. capital Guada. capital P/R DEBIT X X X X CREDIT X X X X Note: When a new partner is admitted by purchase of an interest. Close the Capital Adjustment account Date PARTICULARS July 1 Capital Adjustment Rose. nominal accounts are being replaced by the Capital Adjustment account. profits and loss sharing and other consideration should be drawn because the dissolution of the original partnership cancels the old agreement. a new agreement covering partners’ interest.Decrease in the value of a liability account Date PA RTICULA RS July 1 Liability Capital Adjustment P/R DEBIT X X X X CREDIT X X X X Note: These adjusting entries are similar to the year-end adjustments that we studied in partnership formation. capital Buying partner. capital Capital Adjustment P/R DEBIT X X X X CREDIT X X X X X X X X X X X X X X X X X X X X Admission of a new partner An existing partnership may admit a new partner with the consent of all the partners. Types of Admission of a New Partner 1. Pro-forma entry Date PARTICULARS July 1 Selling partner's name. b. It is considered as a personal transaction between the selling partner and the buyer who becomes a new partner. It merely involves a transfer of capital of the selling partner to the capital of the buying partner. Upon the admission of a new partner.

Total assets and total partners’ equity will increase. 3. total liabilities. the difference is considered either a bonus or goodwill either to the existing partners or the new partner.XXX % New partner XX. 2. This method of admission of a new partner in the partnership implies the following: a. 2.XXX XX.XXX % TOTAL 100% XXX. Agreed capital (AC) – new capitalization of the new partnership which may be equal to. It is a transaction between the partnership and the incoming partner. more than the total contributed capital. Marivic Valenzuela-Manalo 4 .XXX XX. It involves the investment of assets by new partner into the partnership.  Total assets. When the capital credit does not equal the investment of assets in the partnership. capital P/R DEBIT X X X X X X X X CREDIT X X X X Note: When a new partner is admitted by the investment of assets. By investment or asset contributions to the partnership A new partner may be admitted to the firm by investing directly to the partnership. and the new partner's capital account is credited with the capital equity purchased.  Each partner's capital account is debited for the ownership claims that have been relinquished. c.XXX XX. This is done by debiting Cash/Non Cash assets and crediting the new partner's capital account. both the total net assets and the total capital of the partnership increase. Pro-forma entry Date PARTICULARS July 1 Cash Non-cash asset New partner. The transaction is a personal one between one or more existing partners and the new partner. Fraction of interest – this is the interest or equity of a partner expressed in fraction 4.  Any money or other consideration exchanged is the property of the participants and not the property of the partnership. b.XXX % Old partner 2 % XX. and total capital remain unchanged. Contributed capital (CC) – the sum of the investments or contributions of the new and old partners.XXX 100% Important terms used under admission by investment 1. Percentage of interest – this is the interest or equity of a partner expressed in percentage. Framework in analyzing admission of a new partner by investment New Original Analysis of profit and Agreed profit and Contributed Name of loss ratio variance/difference Capital Capital loss ratio partners Old partner 1 % XX.XXX XXX.

whereas the latter decreases total net assets and total capital of the partnership. Determine the total capital of the new partnership by adding the new partner's investment to the total capital of the old partnership. capital Old partner 1. Marivic Valenzuela-Manalo 5 . capital P/R DEBIT X X X X CREDIT X X X X X X X X P/R DEBIT X X X X X X X X CREDIT X X X X Note: The amount of bonus is divided among the old partners using the original profit and loss ratio. The bonus results in a decrease in the capital balances of the old partners based on their income ratios before admission of the new partner. Determine the amount of bonus by subtracting the new partner's capital credit from the new partner's investment. It is an amount partners are willing to allow as additional credit to a partner’s capital in excess of his actual capital contribution. Determine the new partner's capital credit by multiplying the total capital of the new partnership by the new partner's ownership interest. Bonus to old partners Date PARTICULARS July 1 New partner. b. capital Old partner 2. Capital Old partner 2. It is a transfer of capital from one partner to another A bonus to old partners results when the new partner's capital credit on the date of admittance is less than the new partner's investment in the firm. Withdrawal of a Partner As in the case of the admission of a partner. The withdrawal of a partner may be accomplished by (a) payment from partners' personal assets or (b) payment from partnership assets. the withdrawal of a partner legally dissolves the partnership. Allocate the bonus to the old partners on the basis of their income ratios. The former affects only the partners' capital accounts.Bonus 1. The procedure for determining the new partner's capital credit and the bonus to the old partners is as follows: a. A bonus to a new partner results when the new partner's capital credit is greater than the partner's investment of assets in the firm. c. 2. Capital Bonus to new partner Date PARTICULARS July 1 Old partner 1. d. capital New partner.

Using partnership assets to pay for a withdrawing partner's interest is the reverse of admitting a partner through the investment of assets in the partnership. Payment from partners' personal assets is a personal transaction between the partners. It involves the transfer of the withdrawing partners’ capital to the capital account of the buying partner. a. c. It is considered a personal transaction between the buying and selling partners. a bonus to the remaining partners results. revaluing/ adjusting partnership assets and liabilities using a temporary account called the Capital Adjustment account. There is a need to update the capital balances of the partners by a. b. It involves a decrease in capital with the corresponding decrease in partnership assets or increase in partnership liabilities. Types of Withdrawal of a Partner 1. It is considered a transaction between the partnership and the outgoing partner. In a withdrawal of a partner 1. b. b. The effect on the partnership is limited to a realignment of the partners' capital balances. The bonus is deducted from the remaining partners' capital balances on the basis of their income ratios at the time of the withdrawal. a. When the partnership assets paid are in excess of the withdrawing partner's capital interest. c. Partnership assets are not involved and total capital does not change. b. The bonus is allocated to the capital accounts of the remaining partners on the basis of their income ratios.The withdrawal of a partner when payment is made from partners' personal assets is the direct opposite of admitting a new partner who purchases a partner's interest. determining profit share of each partner from the last balance sheet date to dissolution date. Purchase of interest by the partnership a. There are instances where asset revaluations may be recorded. Purchase of interest by another partner or an outsider a. Marivic Valenzuela-Manalo 6 . Payment from partnership assets is a transaction that involves the partnership. When the partnership assets paid are less than the withdrawing partner's capital interest. 2. Both partnership net assets and total capitals are decreased. b. a bonus to the retiring partner results.

capital New partner. Capital DEBIT X X X X CREDIT X X X X By purchase of interest by the partnership .Amount paid is less than the withdrawing partner's capital Bonus to the remaining partners Date PARTICULARS July 1 Withdrawing partner. capital Remaining partner 1.Amount paid is more than the withdrawing partner's capital Bonus to the withdrawing partner Date PARTICULARS July 1 Withdrawing partner. capital Remaining partner 1. capital Cash/Liability P/R DEBIT X X X X X X X X X X X X CREDIT X X X X Death of a Partner The death of a partner dissolves the partnership. When a partner dies it is necessary to determine the partner's equity at the date of death. capital Cash/Liability P/R DEBIT X X X X CREDIT X X X X By purchase of interest by the partnership . capital Remaining partner 2. but provision generally is made for the surviving partners to continue operations. capital Cash/Liability P/R DEBIT X X X X CREDIT X X X X X X X X X X X X By purchase of interest by the partnership .By purchase of interest by another person or an outsider Date PARTICULARS P/R July 1 Withdrawing partner.Amount paid is equal to the withdrawing partner's capital Date PARTICULARS July 1 Withdrawing partner. Marivic Valenzuela-Manalo 7 . capital Remaining partner 2.

4. paying the liabilities. 3. b. emphasis will be placed on the accounting problems and procedures involved in the winding up (liquidation) of the partnership affairs. the account must be adjusted and closed. The partners mutually agree to close the business. Liquidation – the process of winding up a business which normally consists of conversion of assets into cash. d. A business which is in the process of converting its assets into cash and making settlement with creditors is said to be in liquidation. payment of liabilities and distribution of remaining among the partners. The basic objectives of a partnership during liquidation process are to convert the partnership assets to cash. Partnership creditors are paid. c. Realization – the process of converting non-cash assets into cash. 3. Remaining assets are distributed to the partners as a return of their investments. and distributing the remaining cash to partners.Unit 5 PARTNERSHIP DISSOLUTION WITH LIQUIDATION Liquidation of a partnership means winding up the business usually by selling the assets. 2. The firm became bankrupt. and the resulting income or loss in the final period is transferred to the capital accounts of the partners. 2. Partnership assets are sold. Definition of Terms 1. It may be caused by any of the following factors: a. . When the business is to be liquidated. Dissolution with Liquidation 1. to pay off partnership obligations and to distribute cash and any unrealized assets to the individual partners. 5. The purpose for which the partnership was organized has been accomplished. A partnership is liquidated when its business operations are completely terminated or ended. The term/period covered by the partnership contract has terminated. Dissolution – the termination of the life of the partnership. In this unit.

b. Loss on realization – the excess of the carrying amount over the selling price of the non cash assets sold through realization. Types of Liquidation 1. 2. Determine the net income/net loss and close the net income/net loss to partners’ capital accounts. c. 7. selling additional assets and making further payments to partners. Gain on realization – the excess of the selling price over the carrying amount of the non cash assets sold through realization. dividing the available cash to the partners. Marivic Valenzuela-Manalo 2 . This process continues until all the assets have been sold and all cash has been distributed to the creditors and to the partners. d. loan balance and advances to the partnership. Capital deficiency – the excess of a partner’s share on losses over his capital balance resulting to a debit balance in the capital account. 5. Partner’s interest – the sum of a partner’s capital. Finish the accounting cycle. 9. 12. 6. all liabilities are paid. Installment method – involves the selling of some assets. Deficient partner – a partner with a debit balance in his capital account. 8. Right of offset – the legal right to apply part or all of the amount owing to a partner on a loan balance against a deficiency in his capital account resulting from losses in the process of liquidation. 11. Close all drawing accounts to their respective capital accounts. 10. a. Adjust the books. Lump-sum liquidation – a liquidation method whereby all assets are converted into cash. Insolvent partner – personal assets of the partner are less than his personal liabilities. Procedures in Lump Sum Liquidation 1. Solvent partner – personal assets of the partner exceed his personal liabilities. paying the liabilities of the partnership. Close all nominal accounts. Statement of Liquidation – an accounting statement summarizing the winding up of the business affairs of the partnership.4. and all profits or losses are charged to the partners followed by a single liquidating distribution to the partners.

the solvent general partners shall contribute the difference using their loss ratio. If there is no loan or if capital balance still results in a debit balance: b. If a partner has a loan balance – exercise the right of offset (apply the loan balance against the debit balance). b. Cash is to be distributed in the following order of priority: a.1 If partner is solvent and a general partner – deficient partner makes additional cash investment to remove his capital deficiency. The Gain or Loss on Realization account shall be closed to the partners’ capital accounts using profit and loss ratio. If partner’s capital balance results in a debit balance (deficient balance). Note: The final distribution of cash to partners is made based on the partners’ capital balances and not based on the profit and loss ratio. b. b. the remaining solvent partners will absorb the deficiency. Any difference between the selling price and carrying amount of the sold assets shall be recorded in an account called Gain or Loss on Realization. to partners for loan accounts. First. c. Third. Marivic Valenzuela-Manalo 3 . the following may happen: a. Second.2. 3. Sell non-cash assets and distribute gain or loss on realization among partners using profit and loss ratio. a. to outside partnership creditors. 5. to partners for capital accounts. 4.2 If partner is insolvent and general partner or if limited partner – deficient partner is unable to pay. When cash is not sufficient to pay creditors. b.

Loan Rose. Capital Guada. This means that gains are directly credited to the partner's individual capital accounts Marivic Valenzuela-Manalo 4 . Capital Pro-forma Entries DATE P A R T I C U L A R S Selling/Realization of non-cash asset at a gain July 1 Cash Allowance for doubtful accounts Accummulated depreciatiom Gain on realization Non-cash assets P/R D E B I T C R E D I T X X X X X X X X X X X X X X X X X X X X X X X X X Selling/Realization of non-cash asset at a loss July 1 Cash Allowance for doubtful accounts Accummulated depreciatiom Loss on realization Non-cash assets X X X X X X X X X X X X X X X X X X X X X X X X X Important note: Gain or loss on realization account may not be used when liquidation statement is prepared before actually recording the realization of assets in the general journal.Pro-forma Statement of Liquidation (Lump-Sum Method) Name of Partnership Statement of Liquidation Date Covered by the Liquidation NonLiabilities Cash cash assets Profit & loss ratio Balances before realization Realization and distribution of gain or loss on realization Balances Payment of liabilities Balances Payment of partner’s loan Balances Distribution of cash to partners Rose.

DATE P AR T IC UL AR S P/R D E B I T C R E D I T Closing the Gain or loss account when used July 1 Gain on realization Rose. Loan Cash X X X X X X X X X X Return of partners' capital Rose. capital X X X X X X X X X X Marivic Valenzuela-Manalo 5 . Capital Rose. Capital Guada. Payment of partnership liabilities Liabilities Cash X X X X X X X X X X Payment of loan to partner/s Rose. capital X X X X X X X X X X Payment of deficient but solvent partner Cash Guada. Exercise right of off set Guada. Capital Loss on realization X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X Important note: Gain or loss on realization account is closed to partners' capital accounts using profit & loss ratio. Capital Guada. loan Guada. Capital OR July 1 Rose. Capital Guada. capital X X X X X X X X X X Exercise absorption of losses due to capital defiency of an insolvent and deficient partner/s Guada. Capital Cash X X X X X X X X X X X X X X X Important note: Return of partners' capital is based on their final capital balances and not based on P & L ratio.

Special Notes 1. Allocate gain/loss on realization to the partners based on their profit and loss ratios. 3. Make sure that the balances before liquidation show equality of debits and credits. it is necessary to: a. 5. 2. If a partner with a capital deficiency is unable to pay the amount owed to the partnership. Sell non-cash assets for cash and recognize a gain or loss on realization. 6. 3. Maintain separate columns for liabilities to outside creditors and liabilities to partners. Gain on realization increases capital while loss on realization decreases capital. b. c. Each of the steps must be performed in sequence. the partners with the deficiency may pay the amount owed and the deficiency is eliminated. Maintain two columns for the debits – one for cash and one for non-cash assets. In liquidation. d. When this happens. Important notes to remember in lump sum partnership liquidation 1. the partners with credit balances must absorb the loss as follows: a. The allocation of the deficiency is made on the profit and loss ratios that exist between the partners with credit balances. The liquidation of a partnership terminates the business. b. 2. Partnership Liquidation By Installment Frequently partnership assets are not realized through an instantaneous sale but may extend over several months. Distribute remaining cash to partners on the basis of their remaining capital balances. When there is a capital deficiency.) 4. This will always be true after each liquidation transaction. The liquidation of a partnership may result in no capital deficiency (all partners have credit balances in their capital accounts) or in a capital deficiency (at least one partner's capital account has a debit balance. the partners may prefer to receive Marivic Valenzuela-Manalo 6 . The allocation is journalized and posted. The cash distributed to each partner is the difference between the partner's present capital balance and the loss that the partner may have to absorb if the capital deficiency is not paid. 4. 5. Figures in parentheses represent reduction in the account. Pay partnership liabilities in cash. Double rule all columns when all columns are brought to zero balance.

Debit balances in capital and potential capital deficiencies are assumed uncollectible.  Restricted interest. Procedures for Liquidation by Installment The following are the accounting procedures that may be followed in liquidating a partnership by installments: 1. Succeeding cash distributions are then based on the profit and loss ratio. 6. and distribute these among the partners using the profit and loss ratio. Marivic Valenzuela-Manalo 7 . Distribute cash to partners after possible future losses have been apportioned to partners or in accordance with an advance distribution plan. 7. 4. 4. if there are any. Non-cash assets are sold on a piecemeal basis over an extended period of time. Cash realized is immediately distributed to partners after fully satisfying creditors’ claims or after setting aside sufficient cash for these liabilities. Pay the liabilities to outsiders. 5. Installment payments to partners are proper provided that measures are taken to insure that all creditors are paid in full and that there is no over distribution to one or more of the partners. Record the realization of assets and distribute the realized gains or losses among the partners using profit and loss ratio. Cash distribution to partners is considered as if it were the last because total gain or loss on realization is not yet determined. 3. Partners’ interests are reduced by cash distributions to a balance proportionate to the partners’ profit and loss ratios. in the accompanying schedule to determine amounts to be paid to partners. 2. Nature of Installment Liquidation 1. Remaining unsold assets must be treated as a complete loss. Pay liquidation expenses and unrecorded liabilities. 2. 3. shall consist of: a. remaining unsold assets.the amounts due to them in a series of installments rather than wait until all assets have been converted to cash.

These assets are assumed unrealized. According to the schedule.e. simply called Schedule of Safe Payments. capital account or capital and loan accounts combined)after absorption of his share of the maximum possible loss that may occur. Preparation of schedules of safe payments in subsequent periods are no longer necessary because all subsequent payments can be made based solely on the profit and loss ratio. i. debit balances in capital.. is therefore. they are considered loss chargeable to the partners.e. cash withheld for possible expenses. Cash withheld to pay for anticipated liquidation expenses and unrecorded liabilities that may arise. at some point of the liquidation. hence. prepared periodically. Considerable care is therefore. The absence of any partner’s deficiency after distribution of the possible loss signifies that the ratio of the capital balances are in the profit and loss ratio. The deficiency of any of the partners is absorbed by the other partners as additional possible loss to them because he is presumed unable to pay anything to the firm. 2. they can not be sold. The possible loss consists of the following: 1. cash distributions to partners are authorized even before all the losses that may be incurred and charged against the partners are known. Marivic Valenzuela-Manalo 8 . The said expenses and liabilities represent possible loss to the partners because upon payment..b. required to insure an equitable distribution of cash to partners. Cash is. either from sale of assets or from collection of deficiencies from partners. Each partners’ capital is adequate to absorb his share of the maximum remaining possible loss. c. Total value of remaining non-cash assets. the partners’ capital to the profit and loss ratio. the amount paid is to be correspondingly absorbed by the partners. Computation of Safe payments to Partners In installment liquidation. Additional loss may also accrue to the partners when a debit balance in any of the capital account results from the foregoing allocation of possible loss. Payment to partners based on periodic computation of safe payments bring. distributed to a partner only if he has an excess credit balances in his partnership interest (i. The Statement of Partnership Liquidation is usually supported by a schedule of safe installment payments to partners. each installment of cash is distributed as if no more cash is forthcoming.

Introduction to Corporation Accounting CORPORATION . The stockholders have limited liability. The BOD is the governing body or decisionmaking body of the corporation. death. 6. Marivic Valenzuela-Manalo 1 . the corporation has separate legal existence from its owners). 5. insolvency or incapacity of the individual owners. 9. 8. which are transferable units. Powers. Board of Directors (BOD) – Management of the business is vested in a board of directors elected by the stockholders. a corporation can only exercise powers provided by law and powers which are incidental to its existence. 2. attributes and properties expressly authorized by law or incident to its existence (New Corporation Code of the Philippines). 4. The corporation must pay an income tax on its earnings. 10. and the stockholders are required to pay taxes on the dividends they receive: the result is double taxation. It is relatively easy for a corporation to obtain capital through the issuance of stock. 3.an artificial being created by operation of law. Characteristics of a Corporation The characteristics that distinguish a corporation from proprietorships and partnerships are: 1. Separate legal entity – A corporation is an artificial being with a personality separate from that of its individual owners (i. having the right of succession and the powers.. properties expressly authorized by law – Being a creation of law.e. Right of succession – A corporation continues to exist notwithstanding the withdrawal. The mere agreement of the parties cannot give rise to a corporation. attributes. A corporation is an entity created by law that is separate and distinct from its owners and its continued existence is dependent upon the corporate statutes of the state in which it is incorporated. Created by operation of law – A corporation is generally created by operation of law. The corporation is subject to numerous government regulations. Ownership is shown in shares of share capital. Ownership divided into shares – Proprietorship in a corporation is divided into units known as shares of stocks. Changes in the ownership structure do not dissolve a corporation this means that the corporation can have a continuous life. 7.

a corporation in which capital comes from fees or contributions given by individuals. 3. Starts with the issuance of a certificate of incorporation issued by SEC Limited liability Unlimited life Stocks can be transferred from one stockholder to another without getting the consent of the other stockholders. According to Purpose 1. Corporation Initially formed by at least five persons. A stock certificate is a physical evidence of the shares of stock. According to Membership Holdings 1. Open – a corporation whose ownership is widely held by many investors. may be formed orally. 2. Partner is an agent of the partnership. According to Law of Creation 1. Classes of Corporation A. Quasi-public – a private corporation which is given a franchise to perform functions of a public character. Private – a corporation formed for a private purpose. Non-stock corporations are generally non-profit in nature. Transfer of equity of a partner needs the consent of all the partners. Foreign -. 2. Starts with agreement among partners. 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. Public – a corporation formed to render government service 2. C. 2. aim or benefit. D.a corporation that is organized under the laws of other countries. No part of its income is distributed as dividends and any profit shall be used to further the purpose(s) of the corporation. Limited life 5. Domestic – a corporation that is organized under Philippine laws. Closely held or family – a corporation in which 50% or more of its stock is owned by five persons or less.Distinction between Partnerships and Corporations Partnership 1. Stockholders do not act as agents of the corporation. Formed by at least two persons. 6. Marivic Valenzuela-Manalo 2 . Stock corporations are generally profit-oriented. 3. 2. According to the Extent of Membership 1. Unlimited liability 4. Non-stock . B.

Liability of stockholders is limited to the extent of their investment in the corporation. Centralized management under the Board of Directors. The limited liability of the stockholders weakens or limits its credit capacity. It is subject to more taxes. Members – persons who gave fees or contributions to a non-stock corporation. The continuity of corporate existence enables it to obtain a strong credit line. 5. Marivic Valenzuela-Manalo 3 .shares of stocks may be transferred without the consent of the other stockholders. Bigger source of capital may be raised because many individuals invest funds in the corporation. It is not easy to form because of complicated legal requirements and high costs in its organization. Corporation’s activities are limited by the articles of incorporation. Unlimited life. Advantages of a Corporate Form of Business 1. Disadvantages of a Corporate Form of Business 1. Difficulty in formation. Ease of ownership transferability .Components of a Corporation 1. 3. It is subject to more governmental control. 4. There is possibility of abuse of power by the Board of Directors because centralized management restricts active participation by stockholders in the conduct of corporate affairs. Promoters – persons who undertake the necessary steps and procedures to organize the corporation. 4. 6. Corporators – persons who compose the corporation whether as stockholders or members. 3. 2. The corporation has the capacity to act as a legal entity. Subscribers – persons who agreed to buy shares of stock but will pay at a later date. 7. The corporation’s power of succession enables it to enjoy a continuous existence. 7. 3. 5. They must be 5 but not more than 15 natural persons. 2. 4. 6. 5. Underwriters – persons who undertake to sell the shares of stocks to the general public. 2. They should not artificial persons. Stockholders enjoy limited liability. 6. Stockholders or shareholders – owners of a stock corporation. Incorporators – persons who originally formed the corporation and whose names appear in the Articles of Incorporation.

7. The term of existence of the corporation. 8. the date of which is considered as the date of registration or incorporation. 9. The names of the directors who will serve until their successors are duly elected and qualified in accordance with the by-laws. Costs incurred in connection with the formation of the corporation are recorded as an expense. The names. Examples of organization costs are filing fees. The authorized share capital. The amount of subscription to the share capital. At least 25% of the authorized share capital as stated in the articles of incorporation must be subscribed. 3. 5. Marivic Valenzuela-Manalo 4 . 4.Legal Requirements in Organizing a Corporation The process of organizing a corporation consists of three stages: 1. 2. It includes the following information: The name of the corporation. nationalities and addresses of the incorporators. not exceeding 50 years. b. The total amount paid on the subscriptions and the amount paid by each subscriber on his subscription. Pre-operating Costs 2. The purpose or purposes for which the corporation is formed. 3. the classes of stocks to be issued and the number of each class of stock indicating the par value if there is any. Organization Expense 3. Any one of the following account titles may be used in recording organization costs: 1. Organization Costs Articles of Incorporation The Articles of Incorporation enumerates the powers and limitations conferred upon the corporation by the government. Upon approval. Incorporation – formalizes organization of the corporation by filing with SEC the necessary documentary requirements such as articles of incorporation and treasurer’s affidavit attesting compliance to the pre-incorporation requirements. promoters’ commission and legal fees. The following are the pre-incorporation requirements: a. Commencement of the business – the business should start its business within two years from the date of incorporation. 6. the names of the subscribers and the number of shares subscribed by each. 1. 2. cost of printing stock certificates. SEC issues a certificate of incorporation. Promotion – makes preliminary arrangements and solicits subscription to raise sufficient capital for the business. At least 25% of total subscriptions must be paid upon subscription. The place of the principal office of the corporation.

The manner of selecting the corporate officers. Right to vote in stockholders’ meeting. Minute books for meetings of stockholders. 6. d. Right to share in corporate profits upon liquidation. The by-laws normally include the following: 1.contains record of all stock. 2. Right to share in corporate profits (dividends). The circumstances which may permit the calling of special meetings of the stockholders. it may not be issued for less than P5. The date. place and manner of calling the annual stockholders’ meeting. 4. The authority and duties of the directors. No par value – a share of stock that has no fixed value. 8. Ordinary share –the basic issue or ordinary/common type of shares. 7. any sale or transfer of stock. The ordinary share entitles the holder to the following basic rights: a. Journals and Ledgers. 2. the installment paid and unpaid on all stocks. Classes of Stock 1. the names of stockholders or members alphabetically arranged. 9. Stock and Transfer book . The manner of electing the directors. c. b. The by-laws should be filed within one month from the date of issuance of the certificate of incorporation.By-Laws The by-laws of a corporation contain provisions for the internal administration of the corporation. 4. The manner of conducting meetings. The manner of voting and the use of proxies. for which subscription has been made. 3. Corporate Books and Records The corporation generally maintains the following books of accounts and records: 1. Par value –a share of stock that is given a definite or fixed value in the articles of incorporation. Marivic Valenzuela-Manalo 5 .00. Minute books for meetings of Board of Directors. 3. Right to purchase additional shares of stocks in the event that the corporation increases its share capital (pre-emptive right). The procedures for amending the articles of incorporation and by-laws. 3. 5. The term of office of the directors. 2.

Preference share . Terms Commonly Used in Corporation Accounting 1. Share Premium/Paid in capital in excess of par value/stated value . Preference as to payment of dividends.. Outstanding shares – the total shares of stocks issued to subscribers or stockholders. Unissued shares – shares which have never been issued and are available for issuance in the future. Treasury shares . 2. Subscribed shares – shares which investors have contracted to acquire. Pre-emptive right . 3.this account is credited for contribution in excess of par or stated value.4. 10. Marivic Valenzuela-Manalo 6 .refer to the maximum number of shares which may be issued by a corporation as set forth in the articles of incorporation. 9. Authorized shares – . Preference as to distribution of assets upon liquidation. whether or not fully or partially paid (as long as there is a binding subscription agreement) except treasury shares.the right of a stockholder to maintain his ownership interest in the corporation trough purchase of additional shares when new capital is issued. 4. 6.a written acknowledgment by the corporation of the stockholder’s interest in the corporation and its net assets. Subscription -is a contract between a subscriber (buyer of stock) and a corporation ( issuer of stock) whereby the former purchases shares of stocks of the latter with the payment to be made at the later date. b. 8. 5. Certificate of stock .shares which have been issued and fully paid for but subsequently reacquired by the issuing corporation by purchase or by donation. 7.entitles the holder to some specific preferences over the ordinary share such as a. Issued shares – represent shares which were issued to stockholders in the past which at present may or may not be in the hands of stockholders.

c. c. legal fees. Marivic Valenzuela-Manalo 7 . To vote for the board of directors and in corporate actions that require stockholder approval. It represents the legal capital per share that must be retained in the business for the protection of corporate creditors. (b) paying an incorporation fee. In many states the board of directors can assign a stated value to the shares. b. Ownership Rights of Stockholders When chartered. Stock Issue Considerations Authorized stock/share is the amount of stock/share a corporation is allowed to sell as indicated by its charter. The difference between the shares of stock authorized and the shares issued is the number of unissued shares that can be issued without amending the charter. and (d) developing by-laws. To share in corporate earnings through the receipt of dividends. d. Organization costs are expensed as incurred. A corporation has the choice of issuing ordinary share directly to investors or indirectly through an investment-banking firm (brokerage house). No-par share/stock is share capital that has not been assigned a value in the corporate charter. and promotional expenditures. state incorporation fees. whereas indirect issue is customary for a publicly held corporation. Costs incurred in forming a corporation are called organization costs. b. the corporation may begin selling ownership rights in the form of shares of stock. (c) receiving a charter (articles of incorporation). To maintain the same percentage ownership when additional shares of ordinary share are issued (preemptive right). To share in assets upon liquidation (residual claim). Direct issue is typical in closely held companies. Par value share/stock is share capital that has been assigned a value per share in the corporate charter. a. The authorization of share capital does not result in a formal accounting entry. a. Each share of ordinary share gives the stockholder the following ownership rights: a. the entire proceeds are considered to be legal capital. These costs include fees to underwriters. which becomes the legal capital per share. b. When there is no assigned stated value.Unit 7 ACCOUNTING FOR CORPORATION FORMATION Accounting for Share Capital/Transactions Forming a Corporation The formation of a corporation involves (a) filing an application with the Securities and Exchange Commission (SEC).

et al. whichever is more clearly determinable (Weygant. Basic Share capital Transactions There are 5 basic share capital transactions: 1. Share capital may be issued 1. Collection – a subscriber pays his subscription either partially or in full. the stated value is credited to Ordinary share. money/cash 2. 5. Sale of stocks – a stockholder buys stocks and pays immediately in full.The primary objectives in accounting for the issuance of ordinary share are to (a) identify the specific sources of paid-in capital and (b) maintain the distinction between paid-in capital and retained earnings. at a premium – at an amount more than the par value. 3. Marivic Valenzuela-Manalo 8 . Share capital Share capital may be paid by the stockholder or subscriber in the form of 1. par value of the shares of stock 3. property – record the value of the property using the following amounts: a. When no-par ordinary share has a stated value. The amount in excess of par value is treated as share premium. the entire proceeds are credited to Ordinary share. When the selling price exceeds the stated value. at par 2. Authorization –records the maximum number of shares a corporation is authorized to issue. fair value of the property received b. Issuance of certificate – if a subscription is fully paid. whichever is clearly determinable. fair value of the shares of stock. cost is either the fair market value of the consideration given up or the consideration received. When par value ordinary share is issued for cash. 4. Subscription –a subscriber enters into a contract to buy shares of stock. c. When no-par stock does not have a stated value. labor or services – record the cost of the labor or services using the fair value of the services rendered. the par value of the shares is credited to Ordinary share and the portion of the proceeds that is above or below par value is recorded in a separate paid-in capital account. 2006). Stock certificate is issued to the stockholder. the excess is credited to Paid-in Capital in Excess of Stated Value. Important: When shares of stock are issued for services or non-cash assets. a stock certificate is issued to the subscriber. 2.

the stock is said to contain secret reserves. When the value of the asset received is understated. such issuance is called watered stock. The overstatement is done to comply with the requirement of the law that the stock should not be issued at less than its par value. Journal entry method Pro-forma Entries – Par Value Stock Subscribed or Sold at Par Transaction Authorization Sale Subscription Collection Issuance of certificate Memo Entry Method Authorized to issue _____ shares with a par value of P___. Accounting Methods to Record Share capital Transactions 1.Share capital cannot be issued at a discount or an amount less than par under the Philippine setting. Cash Share capital xxx xxx Journal Entry Method Unissued share capital xxx Authorized share capital xxx Cash Unissued share capital xxx xxx Subscriptions receivable xxx Subscribed share capital xxx Cash xxx Subscriptions receivable xxx Subscribed share capital Share capital xxx xxx Subscriptions receivable xxx Subscribed share capital xxx Cash xxx Subscriptions receivable xxx Subscribed share capital xxx Unissued share capital xxx Pro-forma Entries – Par Value Stock Subscribed or Sold at a Premium Transaction Authorization Sale Memo Entry Method Journal Entry Method Authorized to issue _____ shares with Unissued share capital xxx a par value of P___. When the value assigned to the asset received is greater than the par value times the number of shares issued. Authorized share capital xxx Cash Share capital Share premium xxx xxx xxx Cash xxx Unissued share capital xxx Share premium xxx Subscription Subscriptions receivable xxx Subscriptions receivable xxx Subscribed share capital xxx Subscribed share capital xxx Share premium xxx Share premium xxx Cash xxx Subscriptions receivable xxx Subscribed share capital Share capital xxx xxx Cash xxx Subscriptions receivable xxx Subscribed share capital xxx Unissued share capital xxx Collection Issuance of certificate Marivic Valenzuela-Manalo 9 . Memo entry method 2.

3. Preference share is generally issued with par value and with a dividend rate. buildings and loan associations. Stated value should not be less than P5 per share. insurance companies cannot issue no-par stocks. This value is called stated value. Share Premium/Paid in Capital in Excess of Par is recorded/credited at amount in excess of par computed as follows: Paid in capital in excess of par = (Subscription price – par value) (subscribed shares) Accounting for Two Classes of Stock The two classes of stock are ordinary share and preference share. 5. a selling price may be assigned. 3.Special Notes: 1. Subscribed Share capital and Share capital accounts are always recorded/credited at par value. 2. While no par value shares do not carry a nominal value in the certificate. the account titles must be labeled as to whether it is common or preferred. The Subscription Receivable account title is always recorded at subscription prices computed as follows: Subscriptions receivable = subscribed shares x subscription price 2. However. Voting right is frequently given exclusively to ordinary shareholders. Preferred shares which are preferred as to assets can be issued only with par value. 4. The entire consideration received by the corporation for its no par value shares shall be treated as capital and shall not be liable for distribution as dividends.ordinary Ordinary share Preference Subscriptions receivable – preference Subscribed preference share Share premium-preference Preference share Accounting for No Par Shares No par shares do not have a definite or fixed value. No par value shares may not be issued at an amount less than P5 per share. 1. The following account titles may be used. public utilities. Marivic Valenzuela-Manalo 10 . trust companies. Banks. The pro-form entries to record share capital transactions for two classes of stock are the same. Ordinary share entitles the holder to the four basic rights of a stockholder. Ordinary Subscriptions receivable – ordinary Subscribed ordinary share Share premium. 6. No par shares are recorded using the memo entry method only.

It is advisable that new set of books is used by the newly formed corporation.Pro-forma Entries: No Par Value Stock (Memo Entry Method) Transaction Authorization Sale No Stated Value With Stated Value Authorized to issue _____ shares. 4. Record the distribution of stocks. Record the transfer of the assets and liabilities of the partnership to the corporation. 5. no par xxx Subscriptions receivable xxx Subscribed share capital xxx Cash xxx Share capital. no par xxx Cash xxx Subscriptions receivable xxx Subscribed share capital xxx Share capital. no Authorized to issue _____ shares. 3. Marivic Valenzuela-Manalo 11 . Record the issuance of stocks to incorporators. 3. 2. no par. Record the subscription of incorporators. 2. This serves as the payment of the subscription of the partners who became incorporators. Steps or procedures in converting a partnership into corporate form of business Books of the Partnership 1. Books of the Corporation 1. Finish the accounting cycle. Revalue the assets and liabilities using the Capital Adjustment account. 4. Close the balance of the Capital Adjustment account to the partners’ capital accounts in accordance with their profit and loss ratio. no par xxx Incorporating a Partnership A partnership may incorporate after considering the many advantages of a corporate form of business. Record authorized capital sock. Record the receipt of stocks.  Depreciable assets are transferred at net carrying amount.  Accounts receivable is transferred at gross amount together with the allowance for bad debts. no par xxx Share premium stated value xxx Subscriptions receivable xxx Subscribed share capital Share premiumPxx stated value xxx xxx Subscription Collection Issuance of certificate Cash xxx Subscriptions receivable xxx Subscribed share capital xxx Share capital . Cash xxx Share capital . 6. par with a stated value of P___. Close the accounts of the partnership except the capital accounts.

The only difference is that the Capital Adjustment account replaces all the nominal accounts which is eventually closed to the individual capital accounts of the partners. Capital X X X X Note: These adjusting entries are similar to year-end adjustments. Marivic Valenzuela-Manalo 12 . Capital X X X X Guada. Capital Cpital adjustment P/R DEBIT X X X X X X X X CREDIT X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X Close Capital adjustment account with credit balance Capital adustment X X X X Rose.Pro-forma Entries: Books of the Partnership a. Adjust the existing partnership books Date PARTICULARS Increase in the asset value with no contra-asset account Asset Capital adjustment Decrease in the asset value with no contra-asset account Capital Adjustment Asset Increase in the asset value with contra-asset account Contra-asset Capital adjustment Decrease in the asset value with contra-asset account Capital adustment Contra-asset Close Capital adjustment account withdedit balance Rose. Cpital Guada.

Record the distribution of stocks to the partners. Capital Stocks of Name of Corporation To record receipt of stock certificates P/R DEBIT X X X X X X X CREDIT X X X X Note: The debits to the partners’ capital accounts represent their final capital balances Pro-forma Entries: Books of the New Corporation Authorization Authorized to issue _____ shares with a par value of P ___. Subscriptions receivable Subscribed share capital Assets Liabilities Allowance for bad debts Subscriptions receivable Issuance of stock certificates Subscribed share capital Share capital xxx xxx xxx xxx xxx xxx xxx xxx Subscription Collection/Transfer of partnership assets and liabilities Marivic Valenzuela-Manalo 13 . Capital Guada. Record the recipt of stocks from the newly formed corporation Date PARTICULARS Stocks of Name of Corporation Receivable from Name of Corporation To record receipt of stock certificates P/R DEBIT X X X X CREDIT X X X X d.b. Close all the ledger accounts with balances except the partners' capital account and debit "Receivable from Name of Corporation Date PARTICULARS Receivable fron Name of Corporation Liabilities Allowance for bad debts Accumulated depreciation . Date PARTICULARS Rose. P/R DEBIT X X X X X X X X X X X X X X X X X X X X CREDIT c.PPE Assets To record the trasnfer of assets and liabilities to the newly formed corporation.

5. Shares are first given to the highest bidder. The excess shares are given to the defaulting subscriber. no payment is made. 3. 4. If there is no bidder. his subscription is declared as delinquent subscriptions and the subscriber is called a defaulting subscriber. Marivic Valenzuela-Manalo 14 . all subscribed shares are issued. Once the subscription is fully paid. Such shares are considered treasury shares. And these delinquent stocks are offered for sale in a public auction. all of the delinquent shares will be issued in the name of the corporation. The sale of the delinquent subscription is issued to the highest bidder. The highest bidder is the one who is willing to pay the unpaid balance of the subscription plus accrued interest plus all expenses related to the sale and who is willing to receive the least/smallest number of shares. An auction sale is conducted where a highest bidder is chosen. When a subscriber fails to pay his subscription on the call date. 2. According to the Corporation Code of the Philippines. if within thirty (30) days from the said date. the corporation sends several notices to remind him of his obligation. 6. The sale of the delinquent stocks is advertised to have possible buyers/bidders. If no payment was made by the subscriber. all stocks covered by said subscription shall thereupon become delinquent and shall be subject to sale. Payment of the balance on subscription may either be specified in the contract of subscription or in lieu thereof may be subject to call by the Board of Directors.Accounting for Delinquent Subscription There are instances when a subscriber cannot pay in full the amount he subscribed to. The defaulting subscriber does not get any share of stock. All expenses incurred relating to the sale of the delinquent shares will be charged or debited to Receivable from Highest Bidder account since this amount will eventually be collected to the highest bidder together with the unpaid balance of the subscription. 1.

and Luisa for 245 shares. If there is no bidder at all Treasury stock X X X X Subscribed share capital X X X X Receivable fro highest bidder Subscriptions receivable Share capital X X X X X X X X X X X X Illustrative problem: Assume that Joseph subscribed 250 shares of Ordinary share at P25. Due process was taken and the shares were declared delinquent. Record the subscription Date PARTICULARS Subscription receivable Suscribed share capital b. Clare and Luisa were received. The highest bidder pays and corresponding stock certificates are issued Cash X X X X Subscribed share capital X X X X Receivable fro highest bidder X X X X Subscriptions receivable X X X X Share capital X X X X OR f.Pro-forma Entries using the Short Method of accounting for delinquent stocks a.00 At the public auction. Record partial collection Cash Subscription receivable X X X X X X X X P/R DEBIT X X X X X X X X CREDIT c.00 (P20. The corporation incurred costs related to the selling of the delinquent shares Receivable from highest bidder X X X X Cash X X X X e. bids from Mary. he defaulted. Advertising and other cost including those advances made by the corporation amounted to P500. Corporation sends several notices but no payment was made by the subscriber No entry d. The highest bidder paid the amount due and stock certificate was issued by the corporation. Mary bid 230 shares.00 is the par value). After paying 50% on his subscriptions. Marivic Valenzuela-Manalo 15 . Clare for 240. REQUIRED: Record the above transactions.

xxx xxx c. a. The stockholders' equity section of a corporation's balance sheet consists of: (a) paid-in (contributed) capital. The entire amount of retained earnings may be presumed to be unrestricted as to dividend declaration unless restrictions are indicated in the financial statements. shareholders' equity. xxx xxx b. A net loss is debited to Retained Earnings in a closing entry. Retained Earnings Restrictions 1.Unit 8 Accounting for Changes in Shareholders’ Equity Corporate Capital Owner's equity in a corporation is identified as stockholders' equity. . The retained earnings (earned capital) account is part of the stockholders' equity section of a corporation. Paid-in or contributed capital is the investment of cash and other assets in the corporation by stockholders in exchange for capital stock. or corporate capital. Retained earnings account is net income retained in a corporation and is part of the stockholders’ claim on the total assets of the corporation. Net income is recorded in Retained Earnings by a closing entry with a debit to Income Summary and a credit to Retained Earnings. Pro-forma entry: Retained Earnings Income Summary To close net loss for the period. Pro-forma entry: Income Summary Retained Earnings To close net income for the period. Retained earnings restrictions make a portion of the retained earnings balance currently unavailable for dividends. d. A debit balance in Retained Earnings is identified as a deficit and is reported as a deduction in the stockholders’ equity section. and (b) retained earnings (earned capital).

A reversing entry is prepared restoring the amount of appropriation back to the unrestricted balance. A debit balance in the retained earnings account is called a deficit. The retained earnings account has a normal credit balance. 4. Voluntary restrictions. Many states require a corporation to restrict retained earnings for the cost of treasury stock purchased. xxx xxx 3. xxx xxx Contractual restrictions or any future contingencies. the appropriation is not necessary anymore. xxx xxx c. future plant expansion). Pro-forma entry: Retained Earnings Retained earnings appropriated for plant expansion To record appropriation for future plant expansion. xxx . Pro-forma entry: Retained Earnings Retained earnings appropriated for cost of treasury stocks To record appropriation for cost of treasury shares. The board of directors may voluntarily create retained earnings restrictions for specific purposes (for example. Retained earnings restrictions are generally disclosed in the notes to the financial statements. Long-term debt contracts may restrict retained earnings as a condition for a loan. Restrictions result from one or more of the following causes: a.2. Pro-forma entry: Retained Earnings Retained earnings appropriated for contingencies To record appropriation for future contingencies. Pro-forma entry: Retained earnings appropriated for plant expansion xxx Retained Earnings To record reversal of the appropriation for future plant expansion. Legal restrictions. When the cause for restriction no longer exists. b.

contingencies. plant expansion. etc.In Summary: Retained Earnings Credit Net income Reversal of appropriations Debit Net loss Appropriations for treasury shares. Losses from sale of treasury stock Declaration of dividends .

To increase the ratio of liabilities to stockholders’ equity.treasury shares”. To support the market price of the stock. (Baysa and Lupisan. The stock must have been issued originally. To obtain stock to be used in the acquisition of plant assets. 2. The stock must be the entity’s own stock. When treasury stocks are reissued or sold at more than cost. 5. xxx xxx b. Pro-forma entry: Treasury Stock Cash Re-acquired own stocks at P__ per share. 3. Par value method Two Kinds of Treasury Stock 1. To obtain shares for conversion of other securities such as preferred stock. Treasury stocks are recorded at cost.treasury shares xxx Re-issued treasury stocks at above cost. 4. The corporation may reissue these treasury shares at some future date. (Valix and Peralta. 6. The stock is reacquired but not canceled. From this definition.ACCOUNTING FOR TREASURY SHARES Treasury stock/shares is an entity’s own stock that has been issued and then reacquired but not canceled. Pro-forma entry: Cash xxx Treasury Stock xxx Share premium . 2. 1. Cost method – This is the method to be used under local accounting standards 2. To improve earnings per share by reducing the number of shares outstanding. Reacquisition by purchase – under the cost method a. To invest excess cash temporarily. 2007) Two Accounting Methods to Record Treasury Stock 1. three requisites must be present in order that a stock should qualify as treasury stock. 2006) Reasons for Acquiring Treasury Stock 1. the indicated gain is credited to an account called “Share premium . . 3.

Pro-forma entry: Cash xxx Share premium . Or Pro-forma entry: Cash Share premium . liabilities and stockholders’ equity. Reacquisition by donation – Donated stock refers to shares of stock received by the entity from its stockholders by way of donation. the indicated loss is debited to 1) Share premium . However. 2006) Pro-forma entry for the receipt of own shares of stocks as donation Memorandum entry: Received ___ shares from RGM as donation. Donated stock is secured without cost and consequently. . Contributions. the reissue or resale of donated stock increases assets and additional paid in capital. (Valix and Peralta.treasury shares account has been fully exhausted. When treasury stocks are reissued or sold below cost. xxx xxx xxx xxx xxx xxx xxx 2. although it reduces outstanding shares. received from shareholders shall be recorded at the fair value of the items received with the credit going to “Additional Paid in Capital – Donated Stocks” account. it does not affect the entity’s assets.treasury shares if there is an existing balance for this account until all the amount has been exhausted and 2) Retained Earnings if the entire amount in the Share premium .treasury shares Retained Earnings Treasury Stock Re-issued treasury stocks below cost.c. Or Pro-forma entry: Cash Retained Earnings Treasury Stock Re-issued treasury stocks below cost. including stock of the corporation. These stocks are actually treasury stock and may therefore be reissued at any price without any discount liability.treasury shares xxx Treasury Stock xxx Re-issued treasury stocks below cost.

e. these shares are not entitled for dividends. 2. xxx xxx Important Notes 1. Treasury shares do not have the status of outstanding shares. therefore. 3.donated stocks Re-issuance of stocks received as donation. Investments in Trading Securities) but as a reduction to total stockholders’ equity. 4. .Pro-forma entry for the sale of donated shares Cash Share premium . Treasury stock is not viewed as an asset (i. To protect creditors.. Treasury shares do not entitle the holder to the rights of a stockholder. a portion of retained earnings shall be restricted equal to the cost of the treasury stock.

Dividends shall be paid out of unrestricted or free retained earnings. and (c) declared dividends. all issued and outstanding shares b. Dividends out of capital (liquidating dividends) – a return of stockholders’ invested capital.Unit 9 Accounting for Accumulated Profits/Losses Dividends A dividend is a distribution by a corporation to its stockholders on a pro rata (proportional) basis. the stocks of other corporation owned by the company (Lupisan and Baysa. A scrip dividend is declared when the corporation has sufficient retained earnings balance but not sufficient funds at the time for a cash dividend. or stock. subscribed no par shares c. all subscribed par value shares The following shares are not entitles to receive dividends: a. The payment normally includes the principal amount and an interest at a specified rate. unissued shares b. property. it must have (a) retained earnings. A stock dividend is a distribution of dividends in the form of corporation’s own stock. . This type of dividend reduces retained earnings by the cost or carrying value of the property on the date of declaration. Forms of dividends A cash dividend is a pro rata distribution of cash to stockholders. A scrip dividend is a deferred cash dividend. For a corporation to pay a cash dividend. This is consisting of a written promise to pay certain amounts at some future date. The following shares are entitled to receive dividends: a. Dividends out of earnings – distribution to stockholders of corporate earnings in proportion to the number of shares held by them. also known as return on investment. treasury stock Two Kinds of Dividends 1. for example. (b) adequate cash. also known as return of investment. 2. A property dividend is a dividend distributable in the form of non cash assets. The power to declare dividends is vested upon the board of directors. Dividends may be in the form of cash. 2007). scrip. Property distributed normally takes the form of assets that can be easily divided or allocated among stockholders.

When preferred stock is not cumulative. Par or stated value per share is normally assigned for large stock dividends (greater than 20%). Stock Dividend 1. a stock dividend does not decrease total stockholders’ equity or total assets. When preferred stock is cumulative. 2. c. but the number of shares outstanding increases. a. and the book value per share decreases. It only involves transfer of amount from retained earnings to contributed capital. only the current year's dividend must be paid to preferred stockholders before paying any dividends to common stockholders. For a corporation to declare stock dividends there should be unrestricted retained earnings and available original and unissued shares which may be issued as stock dividends A stock dividend results in a decrease in retained earnings and an increase in paidin capital. Payment datethe date dividend checks are mailed to the stockholders and the payment of the dividend is recorded. The corporation declares stock dividends when it wishes to declare dividends but at the same time retain the net assets of the business. Record datethe date that marks the time when ownership of outstanding shares is determined from the stockholders' records maintained by the corporation. 3. . A stock dividend is a pro rata distribution to stockholders of the corporation’s own stock. 4.Three dates are important in connection with dividends: a. Declaration datethe date on which the board of directors formally declares a cash dividend and the liability is recorded. Unlike a cash dividend. any dividends in arrears must be paid to preferred stockholders before allocating any dividends to common stockholders. Preference stockholders must be paid dividends before common stockholders receive dividends. b. For small stock dividends (less than 20%) the accounting profession recommends that the board of directors assign the fair market value per share. 5. Stock dividends have no effect on the par or stated value per share. b.

......................... xxx Stock Dividends Distributable . Large stock dividends – a stock dividend representing 20% or more of the outstanding shares........ xxx 2............................. total stockholders' equity and the par or stated value per share remains the same........................ The account Retained earnings is debited for the fair market value of the stock on the date of declaration.Two Kinds of Stock Dividends 1......................... Date of Declaration: Pro-forma Entry Retained Earnings ........... The account Retained earnings is debited for the par or stated value of the stock.……………............. .... Share premium-Stock dividend account is credited for the excess of the fair market value over its par or stated value.......... When the fair market value of the stock is used.. Date of Distribution: Pro-forma entry Stock Dividends Distributable …………............................... Small stock dividends – a stock dividend representing less than 20% of the outstanding shares...... However....… xxx Ordinary or Preference share …………………………………........ xxx Stock Dividends Distributable ....… xxx xxx Ordinary or Preference share …… ……………………………........................................ the following entry is made at the declaration date: Date of Declaration: Pro-forma Entry Retained Earnings .......... xxx xxx Stock Dividends Distributable is reported in paid-in capital as an addition to either common or preferred stock issued........ Date of Distribution: Pro-forma entry Stock Dividends Distributable ……………………………........ This account is not a current liability because it will not be settled through the use of current assets and is shown as an addition to capital stock outstanding.... xxx Stock dividends change the composition of stockholders' equity because a portion of retained earnings is transferred to paid-in capital.................. Share premium – Stock dividend ....... This account is credited for the par or stated value of the shares to be distributed regardless of whether the stock dividend is small or large..........

....... Preferred stock has priority over common stock in regard to dividends......... Date of Record: No Entry c. The declaration date: the date the board of directors formally declares (authorizes) the cash dividend and announces it to stockholders........ xxx Cash………………………………………………........ The records maintained by the corporation supply this information.. Shareholders' Equity Statement Instead of presenting a detailed stockholders' equity section in the balance sheet and a retained earnings statement.. xxx Dividends Payable…..………................. b.... A declaration of dividends.................... c.. and the increase in the liability dividends payable..... 2. Preferred stockholders must be paid any unpaid prior-year dividends before common stockholders receive dividends if the preferred stock is cumulative...Cash Dividends 1.... The payment date: the date the dividend checks are mailed to the stockholders and the payment of the dividend is recorded........ A cash dividend is a pro rata distribution of cash to stockholders. Retained earnings...... Date of Payment: Pro-forma entry Dividends Payable…........... 3... For a corporation to pay a cash dividend... Date of Declaration: Pro-forma Entry Retained Earnings ......... xxx The record date: the date when ownership of the outstanding shares is determined for dividend purposes...... Three dates are important in connection with dividends: a.... it must have: a.......... .. An entry is required to recognize the decrease in retained earnings.xxx 4. b............ many companies prepare a shareholders' equity statement... Adequate cash..

Income tax expense is reported in a separate section of the corporation income statement before net income. A corporation is considered a separate legal entity for income tax purposes.Corporation Income Statement 1. . Income tax expense and the related liability for income taxes payable are recorded as part of the adjusting process. 2. Income statements for corporations are the same as the statements for proprietorships or partnerships except for the reporting of income taxes.

. FORMULAS IN COMPUTING BVPS 1. One class of stock BVPS = Total Shareholders’ Equity Number of shares outstanding 2. Book value per share is not synonymous with the value of the stock in liquidation and does not generally equal market value per share.Special Topics Book Value per Share (Reference: Financial Accounting by Peralta and Valix) BOOK VALUE PER SHARE (BVPS) It is the amount that would be paid on each share assuming the company is liquidated and the amount available to shareholders is exactly the amount reported as shareholders’ equity. Two classes of stock BVPS = (Preference Share Preference Shareholders’ Equity Number of preference shares outstanding BVPS (Ordinary Share) = Ordinary Shareholders’ Equity Number of ordinary shares outstanding Book value per share represents the equity an ordinary stockholder has in the net assets of the corporation from owning one share of stock.Unit 9 .

3. the share capital outstanding is computed as follows: Shares xx xx xx xx xx Amount P xx xx P xx xx P xx Share capital issued Add: Share capital subscribed Sub-total Less: Treasury share at par Amount and shares outstanding 5. the preference shareholders would share on a pro-rata basis with ordinary shareholders. 2. . following are assumed to be available for dividends:  Accumulated Profit  Share Premium  Revaluation Reserve 4. Where there are treasury share and subscribed share capital. the preference shareholders shall receive and amount equal to the par or stated value. Treasury share shall be treated as a retired share. Important things to Remember about BVPS 1. It can be more than the par value. Liquidation value – amount to be received upon the liquidation of the corporation. and loss on retirement is charged first to Share Premium and then to Accumulated Profit. 4. If there is a deficit. The preference share call price or redemption price is ignored for book value computation. Any balance of the shareholders’ equity in excess of par is apportioned taking into account the liquidation value and dividend rights of the preference shareholders. 3. In the absence of liquidation values. Any gain on retirement is added to Share Premium. An amount equal to the par or stated value is allocated to the preference share and ordinary share 2.Apportionment of Total Shareholders’ Equity into Its Preference and Ordinary Components 1. For book value purposes.

Preference to assets – preference shareholders are entitled to payment not only for the liquidation value but also for dividends in arrears. In the absence of any statement to the contrary. In the absence of specific designation. if only one is participating. 11. 9. the lower rate is the basis for ordinary share allocation b. 6. If there are two classes of preference share with different dividend rates a. preference share is assumed to be non-cumulative and non-participating. the Subscriptions Receivable balance is NOT deducted from Subscribed Share Capital. 10. . the preference share is preference as to dividends. if both are participating.5. Preference as to dividends  Non-cumulative  Cumulative  Non-participating  Participating 7. Dividends in arrears include current dividends. In computing for share outstanding. 8. the basis for ordinary share allocation is the rate of the participating preference share.

Earnings per Share Reference: Philippine Accounting Standards (PAS 33) The earnings per share figure is the amount attributable to every share of ordinary share outstanding during the period. . the denominator in the formula becomes the weighted average shares outstanding. When there has been a change in the number of shares outstanding during the year. The objective of the basic earning earnings per share information is to provide a measure of the interest of each ordinary share of a parent entity in the performance of the entity over the reporting period. If the preference stock is cumulative. c. When the income statement contains any of the sections for material nontypical items. It is not necessary to compute EPS for preference shares because there is a definite rate of return for such share. dividends declared on preference stock are subtracted from net income in determining earnings per share. earnings per share should be disclosed for each component. When a corporation has both preference and ordinary stocks outstanding. Most companies are required to report earnings per share on the income statement. Earnings per share (EPS) indicates the net income earned by each share of outstanding ordinary stock. d. a. The formula for computing earnings per share is: Weighted Average Ordinary Shares Outstanding Net income  = Earnings per Share b. the dividend for the current year is deducted whether or not it is declared.

Basic earnings per share 2. Diluted earnings per share Enterprises required disclosing earnings per share: 1.Two presentations of earnings per share: 1. It is the basis of dividend policies of the company. . Complex Capital Structure – means that the corporation has one or more instruments outstanding that could result in issuance of additional ordinary shares. b. It is a “measure of performance”. c. Uses of earning per share: a. Simple Capital Structure – means that the corporation has only ordinary and nonconvertible preference share. Note: Nonpublic enterprises are not required to present earnings per share but are encouraged to do so in their financial statements. Simple Capital Structure VS. Complex Capital Structure 1. 2. It is a determinant of the market price of ordinary share. The presentation of earnings per share is required for enterprises whose ordinary shares or potential ordinary shares are publicly traded and 2. By enterprises that are in the process of issuing ordinary shares or potential ordinary shares in the public securities market.

If the preference share is non-cumulative. 2.) Date Shares Months Monthoutstanding shares Total . Basic EPS – considers only ordinary shares issued and outstanding.month shares Weighted average = 12 Stock Dividend Months outstanding Month-shares 2.) Date Shares . meaning. Stock dividend is recognized retroactively.   Pro forma computations of Weighted Average Shares: 1. whether such dividend is declared or not. the preference dividend for the current year only is deducted from the net income. If the preference share is cumulative. it is treated as a change from the date. the original shares are issued. the preference dividend for the current year is deducted from the net income only if there is a declaration.BASIC EARNINGS PER SHARE 1. The Basic Equation: Net Income Ordinary Shares Outstanding or Net Income – Dividend on Preference Share Weighted Average Ordinary Shares Outstanding Notes:   The net income is equal to the amount after deducting dividends on preference stock.

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