Generally, the type of business organization, such as sole proprietorship, partnership or

corporation, does not affect the asset and liability sections of the statement of financial
position. The only difference is in the owner’s equity sections.

 Sole proprietorships and partnerships use capital accounts and ultimately combine the
owner’s contributions and accumulated earnings.
 Corporations separately report contributed capital and accumulated profits in accordance
with some legal provisions.

The owner’s equity section of a corporation’s statement of financial position is called

shareholders’ equity. Shareholders’ equity has two major components:

a. Share Capital (contributed or paid-in capital)

b. Retained Earnings.

Share capital reflects the amount of resources received by a corporation as a result of

investment by shareholders, donations or other share capital transactions.

Retained earnings (or accumulated profits or losses) is the amount of capital accumulated and
retained through the profitable operations of the business. The Philippine Accounting Standards
(PAS) has adopted the terminology used in the International Accounting Standards.

The following is the shareholders’ equity section of a statement of financial position:

Share Capital is the shares to be subscribed and paid in or secured to be paid in by the
shareholders, either in money, property or services, at the time of organization of the
corporation or afterwards, and upon which it is to conduct its operations.
The share, contributed or paid-in capital is further divided into the following:

a. Legal Capital. Capital contributed by shareholders comes from the sale of shares of
stock. The shares of stock issued are generally referred to as Share Capital. Legal
capital is that portion of the contributed capital or the minimum amount of paid-in capital,
which must remain in the corporation for the protection of corporate creditors.
The amount of legal capital is determined as follows:

In case of par value shares, legal capital is the aggregate par value of all issued and
subscribed shares.

In case of no-par value shares, legal capital is the total consideration received by
the corporation for the issuance of its shares to the shareholders including the
excess of issue price over the stated value (Section 6, par. 3, Corporation Code of
the Philippines.

b. Share Premium (or Additional Paid-in Capital). It is the portion of the paid-in capital
representing amounts paid by shareholders in excess of par. It may also result from
transactions involving treasury stocks, retirement of shares, donated capital, share
dividends and any other “gain” on the corporation’s own stock transactions.
TWO BASIC TYPES OF SHARES

Share capital is divided into transferable shares of stock. A share of stock represents the
interest or right of a shareholder in a corporation and is evidenced by a certificate of stock.
Share capital includes all types of ownership shares in a corporation. Shareholders acquire either
of the following basic types of share capital.

A. Ordinary Shares. This share represents the basic ownership class of the corporation.
When only class of share is issued, it must be ordinary share. Ordinary shares are the
entity’s residual equity.

B. Preference Shares. This share gives its owners certain advantages over ordinary
shareholders. These special benefits relate either to the receipts of dividends when
declared before the ordinary shareholders (preferred as to dividends) or to priority
claims on assets in the event of corporate liquidation (preferred as to assets).

TERMS RELATED TO SHARE CAPITAL

Authorized Share Capital. The number of authorized shares indicates the maximum number of
shares the corporation can issue as specified in the article of incorporation. This maximum
number of shares when multiplied by the par value of the share will yield the authorized share
capital. Note that any increase or decrease in the authorized share capital requires prior
approval of the SEC and formal amendment to the articles of incorporation.

Issued Share Capital. These are shares which have been sold and paid in full. Issued shares
may include treasury shares. Share Capital, either Ordinary Shares account or Preference
Shares account, is credited for the total par value of fully collected subscriptions or in the case
of no-par value shares, for the total consideration received in relation to the issue. Share Capital
is debited only when the issued shares are retired, redeemed or canceled by the corporation.

Subscribed Share Capital. It is the portion of the authorized share capital that has been
subscribed but not yet fully paid. This shareholders’ equity account is credited for the total par
value of the shares subscribed and debited for the total par value of the fully collected
subscriptions.

Outstanding Share Capital. These are issued shares, which are in the hands of the
shareholders. The number of outstanding shares will equal the difference between the issued
shares and the treasury shares.

Treasury Stock. These are issued shares acquired by the corporation but not retired and are
therefore, awaiting to be reissued at a later date.

ACCOUNTING FOR ISSIUANCE OF SHARE CAPITAL

The entry to record the issuance of share capital depends on whether the stock is with or
without par value.

When shares with par value are sold, the proceeds should be credited to the
share capital account to the extent of the par value of the shares, with any excess
being reflected as share premium.

When shares with no-par value are sold, the proceeds should be credited to the
share capital account. If the no-par stock has a stated value, the excess proceeds
over stated value may alternatively be credited to share premium.

Section 65 of the Corporation Code prohibits the original issue of share capital (or capital
stock) for a consideration less than the par or stated value. It merely indicates the amount per
share to be entered in the share capital account.
Corporations set the par value of their ordinary shares at nominal amounts such as P1 per
share. The par value is no indication of its market value. It merely indicates the amount per
share to be entered in the share capital account.

CONSIDERATIONS FOR ISSUANCE OF SHARES

Share capital may be issued in exchange for any of the following considerations:

1. Actual cash paid to the corporation.

2. Tangible or intangible properties actually received by the corporation.
3. Labor already performed for or services actually rendered to the corporation.
4. Previously incurred indebtedness by the corporation.

SHARE ISSUANCES FOR CASH

Most share issues are for cash since the primary reason for issuing shares is to raise capital for
a corporation’s operating activities. The entries to record the issuance of shares for cash will
depend on whether the shares are with or without par value.

WITH PAR VALUE

1. Issuing Share Capital at Par

Illustration: Narsan Holdings is authorized to issue P1,000,000 ordinary shares divided into
10,000 shares, with a par value of P100 per share. The diversified corporation issued on cash
basis 2,000 shares at par. The share issuance entry will be:

Cash P200,000
Ordinary Shares P200,000

The amount of P200,000 invested in the corporation is called paid-in capital or contributed
capital. The credit to Ordinary Shares increases the share capital of the corporation.

2. Issuing Share Capital Above Par

Illustration: Suppose the 2,000 shares were sold at P150 per share, the entry follows:

Cash P300,000
Ordinary Shares P200,000
Share Premium 100,000

This sale of shares increases the corporation’s contributed capital by P300,000. When the
shares with par value are sold, the proceeds should be credited to the Ordinary Shares account
to the extent of the par value, in this case, P200,000; with any excess to be reflected in the
Share Premium account. The excess of P100,000 is not a “gain”. The corporation can neither earn
a profit nor incur a loss when it issues shares to or acquires shares from its shareholders.

WITHOUT PAR VALUE

1. Issuing No-Par Value Capital

Illustration: Morning Star Travel is a domestic corporation engaged in the business of organizing
tour packages for Asian and European visitors in the Philippines. The entity which is located at J.
Bocobo St., Manila, has two classes of shares, preference shares and no-par value ordinary
shares. 5,000 ordinary shares were issued for P85,000. The entry to record the issue of these
no-par value shares will be:

Cash P85,000
Ordinary Shares P85,000

When shares without par value are sold, the proceeds should be credited to the Ordinary Shares
account. Accounting for issuance of preference shares is basically the same as that of ordinary
shares. Note however, that Section 6 of the Corporation Code prohibits the issue of no-par value
preference shares.

2. Issuing No-Par Value Capital with Stated Value

Illustration: Suppose that Morning Star Travel’s no-par ordinary shares have a stated value of
P20. The entity issued 5,000 shares at P25 per share. The entry will be:

Cash P125,000
Ordinary Shares P125,000

When shares without par-value are sold, the proceeds should be credited to the Ordinary Shares
account. If the no-par value stock has a stated value, the excess proceeds over stated value, in
this case P5 per share, may alternatively be credited to Share Premium.

Cash P125,000
Ordinary Shares P100,000
Share Premium 25,000

SUBCRIPTION OF SHARES

There are times when a corporation sells its shares directly to investors on a subscription
basis. The subscription contract is a legally binding contract which provides for the number of
shares subscribed, the subscription price, the terms of payment and other conditions of the
transaction.

A subscriber becomes a shareholder upon subscription but the stock certificates evidencing
ownership over shares of stocks are not issued until the full collection of the subscription.

Illustration: Warranty Auto Shop, Inc. is a quality car care center located in St. Paul St., San
Antonio Village, Makati City. Assume that 5,000 shares of P10 par value ordinary shares of the
corporation were sold on subscription at P12 per share on Sept. 1, 2019 to Ashley Langga.
Subscription installments of P24,000 and P36,000 will be due on Sept. 16 and 30, respectively.

The related entries follow:

Subscription Receivable P60,000

Subscribed Ordinary Shares P50,000
Share Premium 10,000
To record subscriptions above par.

Cash 24,000
Subscription Receivable 24,000
To record initial installment.

Cash 36,000
Subscription Receivable 36,000
To record final installment.

Subscribed Ordinary Shares 50,000

Ordinary Shares 50,000
To record issuance of stock certificate.

*The subscribed ordinary shares account represents the par value of the subscribed shares.

Subscriptions Receivable is a shareholders’ equity account. It is presented in the statement of

financial position as a deduction from the related subscribed ordinary shares. However, when it
is collectible within one year, this may be shown as a current asset. It is debited for the total
proceeds of the subscriptions to the ordinary shares and credited for the collections on the
subscriptions.

There are instances when a subscriber fails to settle the subscriptions in full on the date
specified in the subscription contract or in the “call” made by the board of directors. In such
case, the subscribed shares are declared delinquent shares. The usual remedy is to dispose of
these shares in a public auction for the account of the delinquent subscriber. These shares will
be sold to the person who is willing to pay the “offer price” which includes the full amount of the
subscription balance plus accrued interest, cost of advertisement and expenses of auction sale in
exchange for the smallest number of shares. This person is referred to as the highest bidder.

Illustration: Assuming the same facts as above except that the subscriber failed to settle part
of his subscriptions in the amount of P48,000. After complying with the legal procedures
pertaining to delinquency sale, a public auction was held. The offer price is P56,000 including
P3,000 accrued interest and P5,000 expenses of sale. Three bidders are willing to pay the offer
price, namely:

Leonore Loqueloque 4,300 shares

Luz Un 4,500 shares
Winnie Villanueva 4,700 shares

Loqueloque is the highest bidder. The 5,000 shares are deemed fully paid. Ashley Langga, the
original subscriber, gets 700 shares and Loqueloque receives 4,300 shares.

Subscription Receivable P60,000

Subscribed Ordinary Shares P50,000
Share Premium 10,000
To record subscription above par.

Cash 12,000
Subscription Receivable 12,000
To record partial initial installment.

Receivable from Highest Bidder 3,000

Interest Receivable 3,000
To record accrued interest on
delinquent shares.

Receivable from Highest Bidder 5,000

Cash 5,000
To record auction expenses.

Cash 56,000
Receivable from Highest Bidder 8,000
Subscription Receivable 48,000
To record sale at public auction.

Subscribed Ordinary Shares 50,000

Ordinary Shares 50,000
To record issuance of stock certificate.

If there is no bidder, the corporation may bid for the delinquent shares and the total amount
due shall be credited as paid in full in the books of the corporation. These shares shall be
considered as treasury shares. All the other entries will be the same except for the following:

Treasury Stock P56,000

Receivable from Highest Bidder P 8,000
Subscription Receivable 48,000
To record purchase of own shares.

A shareholder may be sued directly by creditors to the extent of their unpaid subscriptions to
the corporation (Keller vs COB Marketing, 141 SCRA 86).