Name : Alexander Steven Themas

Student ID : 008201800046

Subject : Principles of Accounting 2

The Corporate Form of Organization

Characteristics of a Corporation
1. SEPARATE LEGAL EXISTENCE

In most countries, an entity is separate and distinct from its owners. The corporation acts under
its own name rather than in the name of its shareholders. Volvo (SWE) may buy, own, and sell
property.

2. LIMITED LIABILITY OF SHAREHOLDERS

Since a corporation is a separate legal entity, in most countries creditors have recourse only to
corporate assets to satisfy their claims.

3. TRANSFERABLE OWNERSHIP RIGHTS

Ordinary shares give ownership in a corporation. These shares are transferable units.
Shareholders may dispose of part or all of their interest in a corporation simply by selling their
shares.

4. ABILITY TO ACQUIRE CAPITAL

It is relatively easy for a corporation to obtain capital through the issuance of shares. Investors
buy shares in a corporation to earn money over time as the share price grows.

5. CONTINUOUS LIFE

The life of a corporation is stated in its charter. The life may be perpetual, or it may be limited to
a specifi c number of years.

6. CORPORATION MANAGEMENT
Shareholders legally own the corporation. However, they manage the corporation indirectly
through a board of directors they elect.

7. GOVERNMENT REGULATIONS

A corporation is subject to governmental regulations. Laws prescribe the requirements for

issuing shares, the distributions of earnings permitted to shareholders

8. ADDITIONAL TAXES

In most countries, owners of proprietorships and partnerships report their share of earnings on
their personal income tax returns.

Accounting for Share Transactions

Accounting for Ordinary Share Issues

The primary objective in accounting for the issuance of ordinary shares is to identify the specifi c
sources of capital.

1. ISSUING PAR VALUE ORDINARY SHARES FOR CASH

2. ISSUING NO-PAR ORDINARY SHARES FOR CASH
3. ISSUING ORDINARY SHARES FOR SERVICES OR NON-CASH ASSETS

Accounting for Treasury Shares

Treasury shares are a corporation’s own shares that it has issued and subsequently reacquired
from shareholders, but not retired.

1. PURCHASE OF TREASURY SHARES

2. DISPOSAL OF TREASURY SHARES

Accounting for Preference Shares

Preference shares have contractual provisions that give them some preference or priority over
ordinary shares. Typically, preference shareholders have a priority as to (1) distributions of
earnings (dividends) and (2) assets in the event of liquidation. However, they sometimes do not
have voting rights.

1. DIVIDEND PREFERENCES
 2. LIQUIDATION PREFERENCE

Dividends

Cash Dividends

A cash dividend is a pro rata distribution of cash to shareholders. For a corporation to pay a cash
dividend, it must have (a) Retained Earnings, (b) Adequate Cash, (c) A Declaration of dividends.

1. ENTRIES FOR CASH DIVIDENDS

2. ALLOCATING CASH DIVIDENDS BETWEEN PREFERENCE AND ORDINARY
SHARES

Share Dividends

1. ENTRIES FOR SHARE DIVIDENDS

2. EFFECTS OF SHARE DIVIDENDS

Share Splits

A share split, like a share dividend, involves issuance of additional shares to shareholders
according to their percentage ownership.

Retained Earnings

Retained Earnings Restrictions

The balance in retained earnings is generally available for dividend declarations. Some
companies state this fact.

Prior Period Adjustments

The correction of an error in previously issued fi nancial statements is known as a prior period
adjustment. The company makes the correction directly to Retained Earnings because the effect
of the error is now in this account.

Retained Earnings Statement

The retained earnings statement shows the changes in retained earnings during the year. The
company prepares the statement from the Retained Earnings account.