- No partnership income tax (general
PARTNERSHIP
As defined in the civil code of the Philippines (article
1767) – is an organization where 2 or more persons
bind themselves to contribute money, property, or
industry into a common fund; with the intention of
dividing profit among themselves
Features of a partnership
- Voluntary association – individuals by their own
free will agree to join together
- Legal entity – partnership has a juridical
personality separate from the partners
o can acquire, sell, or dispose properties
on its own
o can incur obligations and transact
business in its name
- Written agreement – contract between
partners aka Articles of Partnership (Articles of
Co-Partnership) agreement concerning the
formation, operation, dissolution, and
liquidation of partnership
o Governed by contract law
o Outlines the rules of the partnership
- Co-ownership of property – any asset
contributed by a partner becomes property of
the partnership
o new assets purchased by the
partnership are owned by the partners
- Mutual agency – means that every partner is a
mutual agent of the firm
o any partner can bind the business to a
contract
o partners cannot bind the business to
contracts associated with personal
matters
- Limited life – verge of dissolution
- Unlimited liability – each partner has unlimited
personal liability for the debts of the business
o Partners must pay the debts of the
business with personal assets when the
partnership cannot
- Partnership income tax (ordinary partnership) –
taxable like a corporation; tax on income = 30%
professional partnership) – partnership entity
does not pay business income tac
o net income or loss flows through
individual partners
o partners pay personal income tac on
their share of partnership income
- Partners’ capital accounts – accounting for
partnership is just like for sole proprietorship
o each partner needs a separate capital
account
o each partner has a withdrawal account
Partnership advantages
1. can raise more capital than sole
2. brings together the abilities of more than one
person
3. less expensive to operate than corporation
4. no double taxation like corp
5. easy to form
6. no permissions required by the government
Partnership disadvantages
1. partnership agreement could be difficult to
formulate (business needs new agreement
when new partner is admitted or another
withdraws)
2. relations among partners may be fragile
3. mutual agency and unlimited liability create
personal obligations for each partner
Kinds of partnership
As to liability
- General
- Limited
As to property
- Universal partnership of property
- Universal partnership of profits
General partnership
- Each partner is a co-owner of the business, with
all the privileges and risks of ownership
- Profits and losses of partnership are passed to
the partners, who then pay personal income tax
on their share of the income
Limited partnership
 2 classes of partners:
1. At least one general partner – takes primary
responsibility, unlimited personal liability,
usually last to receive a share of profits and
losses
o Often gets all the excess profit after
limited partners
2. Limited partners – do not participate in the
day-to-day operations
o They are liable only to the extent of
their investment
o Usually first to claim of profits and
losses
o limited potential for profits
Universal Partnership of property
- one where all the partners contribute all their
properties into a common fund
Universal Partnership of Profits
- partners contribute all what they will receive as
a result of their work or service rendered during
the lifetime of the partnership
- partners retain ownership of their present and
future property
Kinds of partners
General partner
- manages the partnership
- contributes property or service
- unlimited liability
- assumes the risk of loss of personal property in
the even the partnership becomes insolvent
Limited partner
- invests cash or property
- liability to third party is limited only to his
investment
- no active role in the management
Capitalist partner- contributes money or property into
the partnership fund
Industrial partner - contributes industry or service only
- usually designated as a managing parter
Real partner- actual partner
Nominal partner - partner in name only
Ostensible partner - known to the public that he is a
partner
Secret partner - not known as such to the public
Universal partner - one who’s participation extends to
the entire business
Particular partner - one whose participation extends to
the entire business
How to register a partnership company in the
Philippines?
Register at SEC – obtain barangay clearance – register
SSS – obtain mayor’s permit – Register at BIR
Who can form a partnership?
- 2 or more individuals with or without business
What can be contributed to the partnership?
- Cash (recorded at face value)
- Other form of assets or property (recorded at
FMV or appraised value) Exchange price or cost
principle
- Assets or properties with attached liabilities
(Asset recorded at FMV, liability recorded at
Face value, capital at net of liability)
- Service (memo entry)
- Existing business (assets be transferred and
liabilities be assumed by the partnership at
revalued or adjusted amounts)
Bonus method – no additional asset contribution may
be required; capital of partner may decrease as one
increases
- TCC=TAC
Bonus – special compensation in recognition of
the partner’s ability or expertise in generating
income
If bonus based after interest and bonus
B = interest% (net income – interest – bonus)
Goodwill method – intangible asset representing ability
to generate more earnings more than what is normal or
expected
- Asset will increase, partner’s equity increase
- TAC > TCC
Entity concept – emphasizes the view that a business
unit such as a partnership be treated as separate from
the owner
Propriety theory – view of the individual partners as
owners of the net assets of the business
Assets = Liabilities + Partners’ Equity
Partners’ Equity – rights of the partners over the net
assets of the business
- Partner’s capital and Partner’s drawing
Partner’s Capital – represents original investment which
becomes a permanent or fixed interest; includes
additional investments
Investment – contribution made, credited to
partner’s capital and increase partner’s equity
Permanent withdrawal – debited to each
partner’s capital account to decrease equity
Partners usually invest only once or twice over the
lifetime of the partnership
Partner’s Drawing account
- Reflect temporary interest of a partner
Share in net profit – credited to the drawing
account, increases equity; becomes source of
regular drawings
Personal drawings – oftentimes called salaries
but are in fact withdrawals of profit; debited to
the drawing account; decreases partner’s equity
Unwithdrawn profits – balances in the drawing
accounts
Balance of drawing account is closed to the
capital account
Statement of changes in owner’s equity
- Shows the final balances of the capital accounts
- (capital +additional investment – permanent
withdrawal) + (share in net income- personal
drawings) = capital by the end of the accounting
period
Division of Profit or loss
Function of expense method – presentation of cost and
expenses according to its use
Nature of expense method – rents, expenses are
divided
Expenses and revenues are closed first to income
summary, then is closed to the partners’ drawing
accounts
Fixed capital – credit balance may be withdrawn
anytime and balance of drawing may be left open
Fluctuating capital – if they agree that the balance of
the drawing account be closed to the capital account
Legal provisions affecting profit or loss distribution
- p/l may be distributed at the basis of partners
agreement
- if only the distribution of profit is mentioned, it
goes the same with loss
- if there is no agreement on how to distribute
profit or loss, it will be based on contributed
capital
- an industrial partner has priority in profit
distribution
Factors of distributing profit
1. capital contribution
2. service rendered
3. skill or expertise
Methods of dividing profit and loss
1. Arbitrary ratio (any agreed ratio)
2. Capital ratio based on the ff
a. Initial or original capital
b. Beginning yearly capital
c. Ending yearly capital
d. Average capital (most equitable
method)
 ▪ (Beg cap*12)+ - (D/C(12-diff
between months)/12) = AMC
▪ (AMC/total AMC)*bal
3. Interest based on contributions made, residual
profit in an agreed ratio
4. Salaries to partners for service rendered,
residual profit based on contributions
5. Interest on contributions, salaries to partners,
residual profit in an agreed ratio
6. Interest on contributions, salaries to partners,
bonus to managing partner, and residual profit
in an agreed ratio. Bonus is expressed as:
a. Distribution to profit (n% of net income)
b. An expense (n% of net income after
bonus)
Dissolution
- Occurs when there is change in ownership
- Does not necessarily mean termination
- Article 1828 of the new civil code defines it as
change in the relation of partners ceasing to be
associated in carrying on the business
Most possible Reasons for dissolution:
a. Partners decide to admit new
partner/s
b. Current partner decide to retire or
withdraw
c. Death
d. Partners decide to incorporate
Art 1830 and 1831 four cases of dissolution
1. By the acts of the partners – purpose has
already been accomplished, mutual agreement
2. Operation of law – when there is an illegal
encounter
3. Judicial decree – insanity, fraud, or internal
dissension
Admission of new partner
1. Purchasing from existing partners
- Personal transaction
- Partnership assets will not change
- Transfer of capital
- Excess payment does not affect the partnership
Asset revaluation – existing partners get to
increase/decrease their equity
Revised profit and loss ratio – if there was no
agreement of new p/l ratio, it could be revised
accordingly based on percent of interest
2. Investing asset in partnership
Rules should be applied:
a. Transaction is between the new partner and
the partnership
b. Contribution increases the partnership
assets and partners’ equity
Bonus – a bonus from the new partner may be required
by the existing partners as a privilege of joining them
- Bonus can also be given to the new partner
from the existing partners
Retirement of a partner
Rules to be applied:
1. Capital balance of the retiring partner must be
updated to be used as basis for settlement
a. Asset revaluation
b. Profit distribution
2. Revaluation will affect all partners
3. Only the capital of the retiring partner may be
updated for profit or loss share through
estimation
4. Drawing account of the partner must also be
closed against the capital account
Update account – add profit – close to capital
Transfer of interest may also be done if their
share is purchased, sold, or paid by the
partnership
Death or incapacity of a partner
- Dissolves the original association but the
business may still continue operating with a
substitute taking its place
Flow:
1. Close the capital and drawing account to a
liability account payable to partner’s estate
2. Compute for the partner’s share in the profit
until day of death and credit to the estate
3. At date of settlement, debit the estate and
accrued interest

CORPORATION
Shareholders- owners of a corporation
Trading in a stock market – buy shares in
person/phone/online, thru a broker or brokerage firm
Corporation- attributes of the corporation is based on
Section 2 of the revised corporation code of the Phil
- Governed by phil laws, specifically by
Corporation code of the Philippines
Attributes:
- Artificial being – separate and distinct
personality from the shareholders
- Legal personality – corporation’s identity is
legally created by operations of law and as a
juridical person with rights, powers, and duties.
- Perpetual existence – shall exist for an
indefinite period unless it is expressly limited
provided in articles of incorporation
- Corporate ownership – interest and right over
the corporation is divided into shares of stock
o Interests and rights of the firm is based
on the number of shares and the kinds
of shares
- Limited liability – shareholders are not liable for
corporate acts or debts.
- Transferability of interest – shares of stock
owned by a shareholder may be sold or
transferred without prior consent.
Requirements:
- Incorporation
- Issuance of shares
- Limitation on dividends
- Definition of legal capital
- Procedures for retirement of stocks
Additional:
- 1-15 people may put up a corporation
- Exempted from incorporating are those licensed
to practice a profession
- Minimum capital stock is not required of stock
corporations unless specifically provided when
capital stock is to be increased.
- Within one month after issuance of certificate
of incorporation, corporate by-laws should be
adopted
Advantages of a corporation
- Capital – large amount of resources can easily
be acquired by selling shares through market
like Philippine Stock Exchange
- Liability to corporate creditors – limited liability
is enjoyed by shareholders
- Transferability of interest – shares may be
transferred to others thru stock market
- Formation - easy to form especially by small
and medium enterprises
o Revised corporation code allowed a
one person corporation
- Skilled management – corporation may be
managed by hired professionals
Disadvantages of a corporation
- Tax liability – before 2021, tax is 30% of net
income earned. Revised rate is 20% taxable net
income not more than 5,000,000 and 25% for
above.
- Legal requirements – subject to government
scrutiny because of large capital
o Articles of incorporation and Corporate
By-Laws should be approved to the
Securities and Exchange Commission
(SEC)
o Financial reports are to be reported
periodically
- Control – board of directors and other officers
have direct influence over company policies and
operations.
Corporate structure
Shareholders – board of directors – president – vice
presidents – officers
Incorporators – founders of the corporation
Corporators – owners of the corporation
- Shareholders – stock corporation
- Members – non stock corporation
- they have ultimate control over the corporation
and have the right to vote the board of
directors
 - Board of directors – responsible for the overall
supervision of the firm
o Have final authority on policy making
and control of corporate activities,
evaluate management performance and
act on legal matters
- Officers – appointed by the board of directors;
manages daily operation
- President – aka CEO responsible for
implementing policies set up by BoD
- Vice president – managers of specific
departments: Production, finance, marketing,
and human resources
Kinds of Corporations
1. Private corporation – owned and organized by
a private purpose or objective
a. Stock corporation – privately owned by
individuals organized for profit;
dividends distributed to the owners.
Ownership is sold in units called stock/
shares.
b. Non-stock corporation – such as
religious sect or school organized for
non profit. Owners are called members
and no dividends are distributed.
Purpose can be: religious, civic, or social
in nature.
2. Public corporation – government corporation
organized for the accomplishment of public
functions
3. Close corporation – family corporation or one
which stock is held by selected few and not
open to all. Aka Privately-held corporation
4. Open corporation – stock is listed in the stock
market available for everyone aka publicly-held
corporation
Kinds of Stock
As to value
No par value stock – one without a designated value
stated in the stock certificate; cannot be sold at less
than P5
o The law allows the BoD to tix the value
at some later date.
o Stock is then called no par but with an
issued value or stated value stock.
o No par shares sold are legal capital and
not available for distribution as
dividends.
o Fully-paid and non-assessable shares
As to right –
1. Common stock / ordinary share – entitles the
owner to a pro rata dividend without any
priority over any stockholders.
a. voting rights
b. can be issued at par or no par
c. right over residue dividends and assets
2. Preferred stock / preference share – with
preferential rights or claims over the common
stock.
a. Priority claim over dividend distribution,
and asset distribution in case of
liquidation
b. Usually issued at par and the dividend
rate is expressed as a percentage of the
par value
c. May be convertible to common shares
d. Less risky, higher rate of return, fixed
rate of dividend, preferential rights
Legal Capital
- Minimum permanent investment from
shareholders
- Cannot be distributed in the lifetime of the
corporation
- Trust Fund Doctrine – which the creditors have
right for their claims
o Serves as a cushion of protection for
corporate creditors
- Claims of the creditors can only be satisfied
through corporate assets.
- Investments at par value represents legal
capital
- All proceeds of the issue of no par value shares
are treated as legal capital
- (paid in capital)
- Disadvantageous characteristic in the viewpoint
of corporate creditors is the limited liability of
shareholders
Authorized share capital
 - Maximum number of shares or amounts the
corporation is allowed to issue stated in the
articles of incorporation
Stock Subscription
- Is an agreement to purchase shares of stock
Share capital
- Amount paid in by the shareholders
Certificate of Stock
- Written acknowledgement by the corporation
of the shareholder’s interest in the corporation
and in its net assets.
- A subscriber is not entitled to a certificate
unless the subscription is fully paid for.
Organizational Expenses
- Professional fees, advertising, issuance
expenses
- Aka pre-incorporation cost
Shareholder’s equity
- Owners’ claim in a corporation
- Represents the residual interest of the
shareholders in the net assets of the
corporation
Divided into 2:
1. Contributed or paid in capital
- Represents total contribution made by the
shareholders.
- Capital of the corporation is divided into units
called shares of stock
- Shareholders (owners)’s equity over the
corporation is called Share capital or Capital
Stock
2. Accumulates earnings or Retained earnings
- Profits or losses incurred in the operation of the
business
- Profits earned are accumulated in one account
Flow of accounting for shares of stock
Authorization – sale – subscription – collection of
subscription – issuance of certificate – reacquisition of
sales
Methods of accounting for stocks
1. Memorandum entry
- Authorized shares are in a memo entry
2. Journal entry method
- Authorization is entered as a debit to unissued
share capital and credit to authorized share
capital
Stock transfer – no formal journal entry is made by the
accountant in the accounting records since there is only
a change in the name of the shareholder.
Stock and transfer book – corporations maintain special
journals
Authorization – GJ
Subscription – GJ
Collection of sub – CRJ if cash, GJ if asset
Issuance – GJ
Sale, exchange, cancellations – STB
- Shareholder’s journal
o Number of shares issued and
transferred. No peso amounts
recorded, no debits or credits.
o Issued shares – right side
o Cancelled shares – left side
- Shareholder’s ledger
o Subsidiary ledger containing accounts of
each shareholder.
o Number of shares not in peso amounts
o Certificate cancelled on the left side and
certificate issued on the right side
- Subscription ledger
o Subsidiary ledger containing the
accounts of each subscriber
o Contains stock subscribed or the value
subscription collectible
o Payments of subscriber – right side
o Subscription receivable – left side
o Total should tally with the balance of
subscription receivable in the
shareholder’s journal
Incorporating a partnership
- Partnership may be dissolved to incorporate.
Assets and liabilities need to be adjusted and
 reevaluated prior to transfer to the corporate The default buyer will buy the delinquent shares
book in its offer price and will be issued with the default
- Assets invested = share capital subscription

Delinquent shares

- When stock subscription is not paid on call date Treasury Shares

or date fixed by the board of directors
- Shares of stock which have been issued and
- Law provides 30-day grace period before
fully paid for, but is reacquired by the
declaring the subscription delinquent.
corporation through:
- Unpaid subscription is sold at a public auction to
o Right of redemption
the highest bidder with the lowest amount of
o Purchasing of stock
shares
o Way of donation
- Excess shares shall be issued to the defaulting
- Purchasing treasury shares reduces the assets
subscriber.
and the shareholders’ equity of the corporation
o Ex: default subscription calls for 5,000
by the same amount
shares, default subscriber paid for 1000
- As property of corporation, these could be
shares. Bidder bids for 3000 shares and
issued out as dividends.
pays the offer price therefore claims
- Contra shareholder’s equity account
issuance to 3000 shares. The excess
- Requires sufficient unrestricted retained
1000 shares shall be issued to the
earnings to support the purchase of treasury
default subscriber.
- The restriction is reversed at the sale of
Flow of delinquent shares treasury
- Restricted earnings/ appropriation reserve are
1. Close the subscription receivable to due from
not available for dividend distribution
the highest bidder or receivable rom highest
- Unappropriated or free retained earnings
bidder
(Accumulated earnings) is available for
2. Debit to the receivable from highest bidder the
dividends
expenses incurred in the auction as well as the
accrued interest dating from the date of down purchase of treasury stocks
payment up to the end of 30-day grace period
debit treasury stocks, credit cash
in two separate entries
3. Record the payment of the offer price from the (based on the given price)
highest bidder
4. Issue the shares bid by the bidder and the paid Reissue of treasury stocks (selling)
subscription and excess (if there is any) to the Treasury is always credited at the cost of its purchase
default subscriber.
Debit cash (given price)
If there is no bidder, the corporation or the default
subscriber can buy the shares in the offer price. Credit treasury stock (based on amount purchased)

In terms of corporation, - Reissue price> cost of TS = Cr. Share premium-

TS
Due from highest bidder is credited to treasury - Reissue price< cost of TS= Dr. Share premium-TS
shares for the amount of the balance of receivable + or retained earnings
expenses without the interest. Default subscription
shares are then issued to the company and the default Retirement of treasury stocks
buyer - Means that treasury is canceled or will not be
In terms of the default buyer, reissued
- Permanently reduce the share capital

Debit share capital, credit treasury stock

If retired treasury is higher than its acquisition cost.
Debit share capital, share premium, and retained
earnings, credit cash
Share premium = (no. of shares to retire/total issued no.
of shares)*amount of share premium
Cash= no. of shares to retire * at what price
If treasury is lower than its acquisition cost,
Debit share capital at (no. of shares to retire*cost)
Credit cash at price it was retired
Credit excess on paid in capital from stock retirement
2 methods of accounting for treasury
1. Cost method
- SFAS requires the use of the cost method
- Purchasing the treasury should be recorded at
the cost or amount paid by the corporation
regardless of par.
- Ex: 200 shares were reacquired at P55 per
share.
- Debit treasury shares and Cash at the same
amount of 11,000 or (55*200)
2. Par value method
- Recognizes the treasury at par.
- Cash given may be lesser or higher than the cost
of treasury
Retired shares
- Cash at current par, share capital at initial
- Reacquiring shares can be immediately retired
by debiting share capital instead of treasury.
- Example:
- The company has
- Issued shares: 50,000,P10 par = P500,000
- Share premium = P60,000
The corporation purchased and immediately retires
5,000 shares at P13
Share capital (5000*P10) 50,000
Share premium (5000/50000*60000) 6,000
Retained earnings 9,000
Cash (5000*P13) 65,000
Computation for share premium:
(no. of shares to retire/ total issued no. of shares)* cost
of share premium
The balance is debited to retained earnings or
accumulated profits since there is no given paid in
capital from treasury stock amount
Note:
If the cash credited is lesser than the capital share
capital debited, the difference would be credited to an
additional paid in account from stock retirement
If the treasury is no par with stated value, acquisition as
treasury shares is recorded at the cost price.
Ex: corp has issued 50000 no par shares which 1000
were reacquired at P50 and 500 retired at P40
Treasury shares 50000
Cash (1000*50) 50000
Share capital 20000
Treasury shares (500*40) 20000
Donated shares
- Shares received by either other shareholders, or
other entities
- If from shareholders: it is accounted as credit to
Donated capital/ donated share capital, and
debit to asset; an increase in additional paid in
capital, increases stockholder’s equity (may be
in form of asset or shares)
- Assets to be recorded in FMV
- Memo entry if received donated shares
- If from other entities: it is accounted as credit
to Donated income/ paid in capital from
donated stock; presented in the income
statement
- Recorded in fmv
- Any expenditure related to the donated asset
must be decreased to the account
Computations in equity
Issued shares = amount/par value
Outstanding shares = issued shares – treasury shares
Treasury shares = issued – outstanding
Share premium = total share premium – given share
premium
RETAINED EARNINGS
The shareholder’s equity shows two rights over the
corporate assets:
1. Right over contributed capital or shareholders’
investments and;
2. Right over earned capital or retained earnings

Legal capital contribution = in paid capital (issued and
subscribed capital)
Total share capital = in paid + premium – treasury
Issued price = (amount of issued shares + share
premium)/no. of shares issued
Acquisition cost = treasury cost/no. of shares in treasury
- Corporations are required to maintain separate
accounts for contributed capital and retained
earnings since
o Contributed capital = legal capital
- Retained earnings representing accumulated
profits are allowed to be distributed as
dividends

Retained earnings
Retained earnings Net loss for the period Net income for the
period
- Accumulated profits of the corporation
Dividends Reversal of appropriation
- Source for dividends pay out
reserves
- Deficit in case of accumulated losses Appropriation reserves
Shareholder’s equity shows two rights over
corporate assets: Profitable: credit balance
- Right over contributed capital or shareholders’ Loss: debit balance // deficit (deduction to total
investments and contributed capital)
- Right over earned capital or retained earnings
- Debit or decreases for - Net income or net loss (income summary) is
o Net loss for the period closed to retained earnings.
o Dividends Dividends
o Appropriation reserves
- Credit or increases for - All outstanding capital stocks are entitled to
o Net income for the period dividends
o Reversal of appropriation reserves - Total shares of stock issued, subscribed,
whether fully or partially paid are entitled to
Journal for net income dividends except treasury
Income summary 000 - In delinquent, the dividend is first applied to the
unpaid balance including expenses
Retained earnings 000 - If dividend is declared as a form of stocks, it
Journal entry for net loss shall be withheld until the subscription is paid in
full.
Retained earnings 000
3 significant dates in dividend distribution
Income summary 000
- Date of declaration – liability is increased and
retained earnings is decreased.
o debit retained earnings to the equal
amount of credit to dividend payable
 - Date of record – based on stock and transfer
book, the corporation assesses the accounts
entitled to dividends
o no journal entry
- Date of distribution – dividends declared are
distributed. Liability is decreased and so is asset
o Debit dividends payable and credit
cash/property/share capital
1. Ordinary dividends
o Dividends out of earnings
o Dividends distributed periodically based
on retained earnings
o Based on the number of shares held by
them
o Retained earnings may be distributed as
dividends; there must be sufficient
retained earnings to cover amounts of
dividends
Example: paid in capital is P1M, retained earnings
P1.5M, Bod declared dividends of P500k.
(1,500,000-1,000,000)= 500,000
100% excess of the paid-in capital
Types of ordinary dividends
- Cash dividends – most common type
o can be expressed as peso amount per
share, or percentage of value
D= (no. of share x %)*par value
- Property dividends – used if there is no
available cash or other assets
o if par value of dividend is updated upon
date of declaration, the amount of such
asset should be update too, making the
amount in the computation the new
given par.
D= (no. of share x %)*par value
o once distributed, debit property
dividends payable and credit
investment in (asset)
- Liability dividends
o Deferred cash dividend payable in the
future
o At declaration, cash in unavailable
o “scrip” is given or promise to pay
o Usually, additional interest is paid from
date of declaration to date of payment
o Scrip dividends payable
o Interest expense is debited in the date
of payment
▪ I= (dividend*%)*days/360
o Bond is a form of liability dividend, but
payable can be for a longer period
- Stock dividends
o Distribution of the corporation’s own
stock coming from unissued shares
o Retain its assets
o There is capitalization of retained
earnings
o Transfer of earned capital from
contributed capital = shareholder’s
equity still the same
o Decreasing retained earnings and
increasing paid in capital
o Issuance of less than 20%
▪ Small stock
▪ Charged at RE at FMV
o Issuance of above 20%
▪ Large stock
▪ Charged at RE at Par
(at declaration)
Retained earnings (% x no. of shares issued and
subscribed x FMV/Par)
Stock dividends for distribution (% x no. of
shares x Par value)
Share premium (since may excess kase
inincrease RE)
Debit Stock dividends and credit share capital as per
distribution of dividends
Effect on equity statement:
- Addition to share premium, decrease of
retained earnings
Stock dividends are not a liability account
- Presented as part of paid-in capital
- At par value
 - Shareholders only receive additional number of - voluntary – approved by Bod and shareholders
shares but does not affect their interest (only - contractual – covered by bond and stock issues
memorandum entry is prepared) - legal – covered by law as for treasury shares

ENTRY
Dividends paid to preferred and common shareholders
Debit retained earnings, credit appropriation reserve for
Non-cumulative - entitled to current year dividend only treasury shares

Cumulative – previous dividends not declared will be Total retained earnings are the same but the dividends
added to their part of distribution shall only be based on net of appropriation retained
earnings in the equity statement.
Non participating - entitled to dividends based on their
dividend rate only When the purpose is carried out, cancel the
appropriation by debiting appropriation reserve for
Participating – aside from dividends computed on their
treasury shares and crediting retained earnings.
rate, remaining dividends after distributing to them and
ordinary will be distributed also to them first than to
ordinary

o capital ratio is used in dividing the

residual dividends
o if there is a given %, remainder is
multiplied to the difference of fixed
rate% to needed % and given to the
preference shares before giving the
remainder to ordinary shares

In all cases, entries are:

Debit to retained earnings, credit payable to both

preferred and ordinary dividends (declaration)

Debit payables and credit cash (distribution)

Appropriation of retained earnings

- unless there is restriction, total amount of

retained earnings can be distributed as
dividends
- corporation may need its resources so it is not
advisable to distribute all
- appropriation is to limit the distribution of
retained earnings for the following reasons:
o contingencies – pending lawsuits that
may result to loss
o plant expansion – plan to expand
resources
o bonds and stock redemption –
resources are set aside for eventual
payment

3 types of appropriations