Ateneo de Zamboanga University

ACCOUNTANCY ACADEMIC ORGANIZATION

A School of Management and Accountancy Student Government

Accounting for Corporations

Corporations
 The Philippine Corporation Code defines corporation as “an artificial being created by
operation of law having the right of succession and the powers, attributes, and properties
expressly authorized by law or incident to its existence”

o Is a separate legal entity distinguished from its owners (i.e., shareholders or

members).
o It is formed and dissolved through an operation of law and not by mere agreement
between the owners.
o It has the right of succession, meaning it continues to exist notwithstanding the
withdrawal, death, insolvency, or incapacity of the individual owners.
o Its operations are subject to a higher degree of government regulation compared to
other forms of businesses.
Organization of a corporation (from the Corporation code)
 A corporation is formed by at least 5 but not exceeding 15 natural persons, all of legal age
and a majority of whom are residents of the Philippines.
 The entity’s article of incorporation must be authorized by the Securities and Exchange
Commission (SEC).
 The articles of incorporation states, among other things, the corporation’s authorized capital
stock, which is the maximum number of shares that the corporation can issue. Any excess
shared issue is deemed illegal. In order to issue shares in excess of the authorized capital
stock, the corporation must amend its articles of incorporation.
 To amend the articles of incorporation, a majority vote of the board plus a vote by the
shareholders representing at least two thirds (2/3) of the outstanding share capital is needed.
 At least 25% of the corporation’s authorized capitalization must be subscribed and at least
25% of the total subscription must be paid upon subscription. The paid-up capital cannot be
less than five thousand pesos (P5,000)

Shareholder’s equity
 Share capital (Capital stock)
 Shareholder’s equity is the
Preference share capital (Preferred stock)
residual interest in the assets of
Ordinary share capital (Common stock)
a corporation after deducting
Subscribed share capital (Subscribed capital stock)
all of its liabilities. This is the
Subscription receivable (as a deduction)
equivalent of the “Owner’s
Share dividends distributable (Stock dividends payable)
equity” in a sole proprietorship
Capital liquidated (as a deduction)
and the aggregate of partner’s
Share premium (Additional paid-in capital)
capital balances in a
 Retained earnings (appropriated and unappropriated)
partnership.
 Other components of equity
 Treasury shares (Treasury stock)

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 Ateneo de Zamboanga University
ACCOUNTANCY ACADEMIC ORGANIZATION
A School of Management and Accountancy Student Government

The following transactions affect the accounting for a corporation’s equity:

a. Authorization, subscription, and issuance of shares
b. Acquisition and reissuance of treasury shares
c. Retirement of shares
d. Donated capital
e. Distributions to owners (Dividends)
Accounting for Share capital
An entity accounts for its share capital using one of the following
1. Memorandum method – only a memorandum is made for the authorized capitalization.
Subsequent issuance of shares is credited to the share capital account.

2. Journal entry method – the authorized capitalization is recorded by crediting “authorized

share capital” and debiting “unissued share capital”. Subsequent issuances of shares are
credited to “unissued share capital”. The difference between the two accounts represents the
issued share capital.

*The more commonly used method in practice is the memorandum method.

Memorandum method vs Journal entry method
 Authorized capitalization
1. On January 1. 20x1. ABC Co. received authorization from the SEC to issue share capital of
P1,000,000 divided into 10,000 shares with par value per share of P100.

Memorandum method Journal entry method

Memo entry – the authorized capitalization Unissued share capital 1M
is P1,000,000 divided into 10,000 shares Authorized share capital 1M
with par value per share of P100

 Subscription
2. Of the total authorized share capital, 25% was subscribed at par value and 25% of the total
subscription was paid at the subscription date.

Memorandum method Journal entry method

Cash 62.5K1 Cash 62.5K
Subscription receivable 187.5K Subscription receivable 187.5K
Subscribed share capital 250K2 Subscribed share capital 250K
1 - (1m x 25% x 25%), 2 – (1m x 25%)

Subscription – a contract between the purchaser of shares (i.e., investor) and the issuer (i.e.,
corporation) in which the purchaser promises to buy shares of the issuing company’s stocks.
Subscription receivable – represents the unpaid portion of the subscription price. It is
presented as a contra equity account.
Subscribed share capital – represents the portion of the authorized share capital that is
subscribed but not yet issued.

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 Ateneo de Zamboanga University
ACCOUNTANCY ACADEMIC ORGANIZATION
A School of Management and Accountancy Student Government

 Collection of subscription receivable and issuance of shares

3. On February 1, 20x1, ABC Co. received full payment for 2,000 subscribed shares and issued
the related share certificates

Memorandum method Journal entry method

Cash 150K* Cash 150K
Subscription receivable 150K Subscription receivable 150K
Subscribed share capital 200K Subscribed share capital 200K
Share capital 200K Unissued share capital 200K

*Subscription price of 2,000 shares (2,000 x P100 par) 200,000

Portion already paid (50,000)
Balance collected 150,000

Share capital – represents the portion of the authorized share capital that is already issued.
Share certificate – is a document that evidences the ownership of a share.

 Cash subscription
4. On February 28, 20x1, ABC received cash subscription for 1,000 shares at par value

Memorandum method Journal entry method

Cash 100K Cash 100K
Share capital 100K Unissued share capital 100K

The share capital of ABC Co. as of February 28, 20x1 is shown below:

Memorandum method Journal entry method

Share capital 300,000 Authorized share capital 1,000,000
Subscribed share capital 50,000 Unissued share capital (700,000)
Subscription receivable (37,500) Issued share capital 300,000
Subscribed share capital 50,000
Subscription receivable (37,500)

Total share capital 312,500 Total share capital 312,500

Classes of share capital

1. Ordinary shares (common stock)

 Represents the residual corporate interest that bears the ultimate risk of loss and receives
the benefits of success.
 Ordinary shareholders have four basic rights (right to attend and vote in meetings,
preemptive/stock right, right to dividends, and right to share in the net assets if the
corporation upon liquidation.

2. Preference shares
 Are shares that give the holders thereof certain preferences over other shareholders
(includes priority claims over dividends and net assets upon corporate liquidation) in
exchange for certain ordinary shareholder’s inherent rights.

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 Ateneo de Zamboanga University
ACCOUNTANCY ACADEMIC ORGANIZATION
A School of Management and Accountancy Student Government

Share premium (additional paid-in capital)

- arises from various resources which includes the following:
1. Excess of subscription price over par value or stated value.
2. Excess of reissuance price over cost of treasury shares issued.
3. Distribution of “small” stock dividends.

Treasury shares
- are an entity’s own shares that were previously issued but are subsequently reacquired but not
retired.
- an entity may reacquire its previously issued shares only if it has sufficient unrestricted
retained earnings (Corp. code)

Treasury shares are accounted for using the cost method. Under the method, the reacquisition
and subsequent reissuance of treasury shares are recorded at cost.

Retirement of shares

Shares are considered retired if they have been reacquired and cancelled according to the
Securities and Exchange Commission (SEC) regulations. Unlike for treasury shares which can be
subsequently reissued, retired shares cannot be reissued anymore.

Donated capital

Donated capital arises form gifts received by the corporation from nonreciprocal transactions.
Donated capital may arise from the following:

1. Donations from shareholders – these are credited to share premium.

2. Donations from the government – these are recognized as government grants.
3. Donations from other sources – these are recognized as income when (a) the conditions
attached to the donation are fulfilled or are reasonably expected to be fulfilled, (b) the
donation becomes receivable, and (c) the criteria for asset recognition are met

Donations from shareholders may be in the form of

a. Cash – recognized at the amount of cash received or receivable
b. Noncash assets – recognized at the fair value of the noncash assets
c. Entity’s own shares – initially recorded through memo entry. Donated capital is
recognized only when the donated shares are subsequently reissued. This is because no
asset is generated from the donated shares until they are subsequently reissued. If the
donated shares are not to be resold the entity should effect a formal reduction of its
authorized share capital by retiring the shares received.

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