The accounting cycle of a corporation is essentially the same as that of a sole proprietorship and

partnership. Transactions, such as purchase and sale of merchandise and payment of liabilities, are
recorded in the same manner as that of the two other forms of business organization. There are, however,
special transactions that would only be encountered in a corporate form of business. Those transactions
are the focus of this module.

After successful completion of this module, you should be able to:

 Identify financial statements of a corporation
 Prepare closing entries of a corporation
 Understand dividends and its types
 Account for dividend transactions
 Compute for book value per share and earnings per share
 Appropriate retained earnings

1. Statement of Financial Position. The asset and liability section of the balance sheet
of a corporation is the same as that of a partnership and a sole proprietorship. However,
the equity portion of a corporation is called “Stockholders’ Equity or Shareholders’
Equity”, it is generally composed of the following:
a. Contributed Capital. Includes the par value or stated value of shares
subscribed, issued, and distributable as dividends, as well as any premium or
additional paid in capital. (Issued + Subscribed + Share Dividends Distributable
+ APIC)
i. Share Capital (Legal Capital) (Issued + Subscribed + Distributable; if
no-par, no stated value Total consideration received)
ii. APIC – Share Premium or PIC in excess of SV
b. Retained Earnings. Accumulated profits of a corporation since its organization
reduced by losses, dividends and other transactions. This can be appropriated
or unappropriated. A debit balance in retained earnings is called a deficit.
c. Accumulated Other Comprehensive Income
NOTES:
 No dividends must be distributed if it will impair the legal capital.
 The subscription receivable account is generally reported as a contra account to
shareholder’s equity, as an offset against the Subscribed Share Capital Account.
Alternatively, if collection is expected within 12 months from the end of the reporting
period, the Subscription receivable account balance is reported as current asset.

2. Statement of Comprehensive Income

a. Profit and loss section. Composed of revenues, expenses, gains and losses for the
period. Items from this section are being closed to the “Retained Earnings account”
under the equity section.
b. Other comprehensive income section. This section contains items of gains and
losses which are required by some standards to be reported under “Other
Comprehensive Income”. This means that they are instead listed after net income
on the income statement. Revenues, expenses, gains and losses appear in other
comprehensive income when they have not yet been realized. Once they are
realized, they become part of the Profit & Loss. Items from this section are being
transferred to the equity section under “Accumulated Other Comprehensive
Income”.
3. Statement of Changes in Equity. This shows the movement of the items under the
equity section of the Statement of Financial Position such as share capital accounts,
retained earnings, and accumulated other comprehensive income.
4. Statement of Cash Flows. Same with sole proprietorship and partnership.
5. Notes to the financial statements

The adjusting entries of the corporation are the same as compared with sole proprietorship and
partnership. The closing entries, on the other hand, are as follows:
Transaction Pro-forma Entries
To close sales accounts to the ‘Income Sales XX
Summary’ account Income Summary XX
To close expenses accounts to the Income Summary XX
‘Income Summary’ account Expenses XX
If ‘Income Summary’ has a credit balance (profit):
Income Summary XX
Retained Earnings XX
To close the ‘Income Summary’ account
to ‘Retained Earnings’
If ‘Income Summary’ has a debit balance (loss):
Retained Earnings XX
Income Summary XX
Dividends are distribution to the shareholders of the corporate earnings based on the number of shares
held by them. Unlike sole proprietorship and partnership, the net income of the corporation are not
directly credited to the capital accounts of the owners. Instead, dividends represent the share that they
will get from the earnings. Important matters to remember concerning dividends are as follows:
 Dividends are paid out of the retained earnings and only outstanding shares are entitled.
 The power to declare dividends is vested upon the board of directors.
 Important dates concerning dividends:

Date of Date of Record Date of

declaration Distribution

• Approval by • Shareholders • Date of actual

BOD as of this date payment of
• Entry to debit Dividends- would be the Ex-Dividend the dividends
Ret. Earnings on recipient of to the
the dividends shareholders

o From the date of declaration to the date of record, the shares would sell dividends-
on, meaning whoever bought the shares during this period would be the recipient
of the dividend.
o From the date of record to the date of distribution, the shares would sell ex-
dividend, or without the dividend.

Type of Dividend Description Pro-forma Entries

On date of declaration:
These are dividends Retained Earnings XX
distributed in the form of Cash Dividends Payable XX
Cash Dividends
cash. This is the most On date of payment:
common type of dividends. Cash Dividends Payable XX
Cash XX
On date of declaration:
This is a written promise to Retained Earnings XX
pay certain amount at a Scrip Dividends Payable XX
future date. When there is On date of payment:
Scrip Dividends sufficient RE, but not Scrip Dividends Payable XX
sufficient cash for declaration Interest Expense XX
of Cash Dividends, Scrip Cash XX
Dividends are declared. *If not paid as of year-end, interest accrual is
necessary.
 Type of Dividend Description Pro-forma Entries
On date of declaration:
Retained Earnings XX
Dividends distributable in the Property Dividends Payable XX
form of non-cash assets are
known as property dividends.
Year-end adjustment:
Rules: *If there is increase in FV of asset:
 Recorded at FV of NCA Retained Earnings XX
distributed Property Dividends Payable XX
 At year-end, the amount
*If there is decrease in FV of asset:
of the FV of the asset
Property Dividends Payable XX
shall be re-measured
Retained Earnings XX
and the difference
Property Dividends between the previous
On date of payment:
and current FV shall be
*If CV of asset=Dividends Payable:
adjusted in RE and
Property Dividends Payable XX
Dividends Payable
Asset XX
account.
 On the settlement date, *If CV of asset<Dividends Payable:
the difference between Property Dividends Payable XX
the CV of asset & CV of Asset XX
Dividends Payable shall Gain on Distribution XX
be charged to P/L as
gain or loss on *If CV of asset>Dividends Payable:
distribution. Property Dividends Payable XX
Loss on Distribution XX
Asset XX
Distribution of the SMALL STOCK DIVIDEND
corporation’s own shares as On date of declaration:
dividends. This does not Retained Earnings XX
affect total asset and total SC Dividends Distributable XX
equity. (Only a transfer within SP or PIC in excess of SV XX
the equity section) On date of payment:
 Small stock dividend: SC Dividends Distributable XX
less than 20%. Share Capital (or Unissued SC) XX
Stock Dividends
Recorded at FV of
shares on date of LARGE STOCK DIVIDEND
declaration. On date of declaration:
 Large stock dividend: Retained Earnings XX
20% or more. Recorded SC Dividends Distributable XX
at par or stated value On date of payment:
of the shares on date of SC Dividends Distributable XX
declaration. Share Capital (or Unissued SC) XX
Dividends for preference shares are paid first before ordinary shareholders. The amount of dividends
distributed to the preferred stock would depend on the following features:

 Cumulative. Unpaid dividends of prior years (dividends in arrears) must be paid first
before the current year.
 Noncumulative. Dividends of prior years are not paid.
 Participating. Preference share would receive additional dividends aside from the
fixed dividend rate stated.
a. Fully Participating. Excess dividends are allocated proportionately between
the two classes of share capital based on total par or stated value.
b. Partial Participating. Lower between full participation amount and the
amount based on the percentage of participation mentioned.
 Nonparticipating. Preference shares are not entitled to any dividend aside from the
regular dividends on their shares.

This is the peso equity in corporate capital of each share capital. It is the amount that would be paid on
each share in case of corporate liquidation assuming there is sufficient amount to cover the shareholders’
equity amount.

 Only one class of share:

BVPS = Total SHE ÷ shares outstanding (including subscribed shares)

 Two classes of share:

For the preference shares:
 Equity identified w/ preference: Liquidation Value of PS + Dividends in Arrears
BVPS = Equity identified w/ PS ÷ outstanding pref. shares
For the ordinary shares:
 Equity identified w/ ordinary: Total SHE – equity identified w/ preference shares
BVPS = Equity identified w/ OS ÷ outstanding ord. shares
This is the amount earned during a given period on each share outstanding.

 Only one class of share:

EPS = Profit ÷ ordinary shares outstanding

 Two classes of share:

Profit or loss XX
Less: Dividends declared on noncumulative PS
XX
or Dividends on cumulative PS (whether declared or not)
Profit attributable to ordinary shares XX
÷ ordinary shares outstanding XX
EPS XX

Appropriation of retained earnings means that a certain portion of RE is set aside for a specific purpose
and is not available for distribution as dividends. Reasons for appropriation of retained earnings are as
follows:

1. Legal Restrictions. The law requires appropriation of retained earnings equal to the
amount of Treasury Shares acquired.
2. Contractual Restrictions. These are appropriations required by contracts, normally an
obligation with a creditor. This is done in order to protect the interest of the creditor in case
the corporation fails to pay the amount due.
3. Discretionary Action. These are appropriations decided upon by the board of directors.
Normally, this is related to future expansion plans such as appropriation for acquisition of
capital assets or plant expansion.
Pro-forma entries:

 For appropriation:
Retained Earnings XX
RE appropriated for _____________ XX

 Cancellation of appropriation:
RE appropriated for ____________ XX
Retained Earnings XX