CORPORATION powers, attributes, and properties expressly
authorized by law or incident to its existence.
LESSON 1
Introduction/Overview
This module covers the concepts involved in a
corporation. At the end of this module, the
learners are expected to be able to distinguish
corporation, in different aspects, from the
previous two types of business organizations.
DEFINITION
A corporation is 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. (Section 1, Corporation Code of the
Philippines)
CHARACTERISTICS OF A CORPORATION
1. Separate legal entity – artificial being. A
corporation is an artificial being with personality
that is separate and distinct from that of its
individual owners. Thus, it may, under its
corporate name, take, hold or convey property to
the extent allowed by law, enter into contracts,
and sue or be sued.
2. Created by operation of law. A
corporation is generally created by operation of
law. The mere agreement of the parties cannot
give rise to a corporation.
3. Right of succession. A corporation has the
right of succession. Irrespective of the death,
withdrawal, insolvency or incapacity of the
individual members or shareholders, and
regardless of the transfer of their interest or
share capital, a corporation can continue its
existence up to the period of time stated in the
articles of incorporation but not to exceed fifty
years.
4. Powers, attributes, properties
authorized by law. A corporation has only the
5. Ownership divided into shares.
Proprietorship in a corporation is divided into
units known as share capital. The buyers of this
share capital are called shareholders or
stockholders and are considered owners of the
business.
6. Board of directors. Management of the
business is vested in a board of directors elected
by the shareholders. The board of directors is the
governing body or decision-making body of the
corporation. The Corporation Law provides that
the number of directors be not less than five but
not more than fifteen.
ADVANTAGES OF A CORPORATION
1. The corporation enjoys continuous
existence because of its power of succession.
2. The corporation has the ability to obtain a
strong credit line because of continuity of
existence.
3. Large scale business undertakings are made
possible because many individuals can invest
their funds in the enterprise.
4. The liability of its investors or shareholders
is limited to the extent of their investment in the
corporation.
5. The transfer of shares can be effected
without the need for prior consent of other
shareholders.
6. Its smooth operation is guaranteed because
of centralized management.
DISADVANTAGES OF A CORPORATION
1. It is not easy to organize because of
complicated legal requirements and high costs in
its organization.
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2. The limited liability of its shareholders may
weaken its credit capacity.
3. It is subject to rigid government control.
4. It is subject to more taxes.
5. Its centralized management restricts a more
active participation by shareholders in the
conduct of corporate affairs.
A. Classes of Corporation
Corporations are generally classified according to
purpose, membership holdings, compliance of
law, law of creation, or extent of membership.
1. As to membership holdings
a. Stock corporation – a private corporation
in which the capital is divided into shares of
stocks and is authorized to distribute corporate
earnings to holders on the basis of shares held.
b. Non-stock corporation – a private
corporation in which capital comes from fees
paid by individuals composing it. The owners of a
non-stock corporation are called members.
2. As to purpose
a. Public corporation – a corporation that is
organized to govern a portion of the state ( e.g.
municipalities, provinces).
b. Private corporation – a corporation that is
organized for a private benefit, aim or end.
c. Quasi-public corporation – a private
corporation which is given a franchise to perform
functions of a public character. Classified under
this type are the so-called public utility
corporations such as MERALCO and PLDT.
3. As to compliance of law
a. De jure corporation – a corporation which
exists both in law and fact. It exists in law
because it has complied with all the legal
requirements; it exists in fact because it actually
operates as a corporation.
b. De facto corporation – a corporation which
exists only in fact but not in law because of non-
compliance with certain legal requirements.
4. As to law of creation
a. Domestic corporation – a corporation that
is organized under Philippine laws.
b. Foreign corporation – a corporation that is
organized under the laws of other countries.
5. As to extent of membership
a. Open corporation – a corporation whose
ownership is widely held by many investors,
usually a private stock corporation.
b. Closely-held corporation or family
corporation – a private corporation in which 50%
or more of its stock is owned by five persons or
less.
6. As to number of stockholders
a. Regular corporation – consists of 2 or
more stockholders
b. One person corporation (OPC) – consists
of single stockholder
7. As to charitable purpose or not
a. Ecclesiastical – organized for religious
purposes.
b. Eleemosynary – established for public charity.
c. Civil – established for business or profit.
8. As to relation to another corporation
a. Parent or holding – a corporation that is
related to another corporation that it has the
power to either directly or indirectly elect the
majority of the directors of a subsidiary
corporation.
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b. Subsidiary – a corporation controlled by
another corporation known as a parent
corporation.
B. Components of Corporation
1. Incorporators – they are the persons who
originally formed the corporation and whose
names appear in the Articles of Incorporation.
They must be natural persons as distinguished
from artificial persons.
2. Corporators - they are the persons who
compose the corporation whether as
shareholders or members.
3. Stockholders or shareholders - they are
the corporators of a stock corporation.
4. Members – they are the corporators of a
non-stock corporation.
5. Promoters – they are the persons who
undertake to (a) form a company based on a
given project, (b) set it going, and (c) take the
necessary steps to accomplish the purpose for
which the corporation is organized.
6. Subscribers – they are the persons who
have agreed to take original, unissued shares but
will pay at a later date. They may be
incorporators or not and they may eventually
become shareholders the moment the full
payment of their subscriptions is made.
7. Underwriters – they are those who
undertake to dispose of the shares to the general
public.
C. Organizing a Corporation
The process of organizing a corporation generally
consists of three stages which normally requires
the aid of legal, competent advisers. These three
stages are discussed below:
1. Promotion – the incorporators make
preliminary arrangements to set up a tentative
working organization and to solicit subscriptions
to raise sufficient capital for the business.
2. Incorporation – the process of formalizing
the organization of a corporation. This includes:
a. Drafting of the Articles of Incorporation
which must be duly executed and acknowledged
before a notary public.
b. Filing of the articles of incorporation with
the Securities and Exchange Commission (SEC).
c. After the required fees have been paid and
upon approval of the articles of incorporation, the
SEC issues a certificate of incorporation, the date
of which being considered as the date of
registration or incorporation.
3. Commencement (Formal organization)
of the business – the business should start its
operations within two years from the date of
incorporation. Failure to do so will automatically
dissolve the corporation without the need for a
hearing.
Costs incurred during incorporation, such as
filing fees, cost of printing stock certificates,
promoter’s commission and legal fees, are known
as organization costs or pre-operating costs.
Under PAS 38 Intangible Assets, organization or
pre-operating costs are charged to expense in the
period incurred.
D. Corporate Records
The corporation generally maintains the
following records to keep track of the various
transactions:
1. Record of all business transactions
(journals, ledgers, vouchers)
2. Minutes of all meetings of directors.
3. Minutes of all meetings of shareholders.
4. Stock and transfer book
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a. Shareholder’s journal – chronological and
numerical record of stock certificates issued.
b. Shareholder’s ledger – alphabetical record
of individual shareholders.
c. Subscriber’s ledger – alphabetical record of
individual subscribers.
5. Optional and supplementary records
F. By-Laws
The by-laws of the corporation supplement the
articles of incorporation. It contains provisions
for the internal administration of the corporation.
The corporate by-laws normally includes the
following:
1. The date, place, and manner of calling the
annual shareholders’ meeting;

2. The manner of conducting meetings;

E. Articles of Incorporation 3. The circumstances which may permit the
The Articles of Incorporation enumerate the calling of special meetings of the shareholders;
powers and limitations conferred upon the 4. The manner of voting and the use of
corporation by the government. It includes the proxies;
following information:
5. The manner of electing the directors and the
1. The name of the corporation; number of directors;
2. The purpose or purposes for which the 6. The term of office of the directors;
corporation is formed;
7. The authority and duties of the directors;
3. The place of the principal office of the
corporation; 8. The manner of selecting the corporate
officers;
4. The term of existence of the corporation, if
there is any; 9. The authority and responsibilities of the
officers;
5. The names, nationalities, and addresses of
the incorporators; 10. The procedure of amending the articles of
incorporation; and
6. The names of the directors;
11. The procedure of amending the by-laws.
7. The authorized share capital, the classes of
share capital to be issued, and the number of
shares and terms of each class indicating the par
value per share;

8. The amount of subscriptions to the share

capital, the names of the subscribers and the
number of subscribed shares by each; and

9. The total amount paid on the subscriptions

to the share capital and the amount paid by each
subscriber on his subscription.

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CORPORATE FORMATION
LESSON 2
1. Introduction
This module demonstrates the procedures
involved in accounting for share capital issuance
of a corporation. At the end of this module,
learners will be able to record share capital
transactions under various considerations and
instances.
2. SHARE CAPITAL (CAPITAL STOCK)
Share capital is also known as capital stock. It is
the amount fixed by the corporate charter to be
subscribed and paid in or secured to be paid in by
the shareholders of a corporation either in money
or in property, labor or services upon the
organization of the corporation or afterwards;
and upon which it is to conduct its operations.
3. CLASSES OF SHARE CAPITAL
A corporation may issue two classes of share
capital, namely, ordinary share capital
(common stock) and preference share capital
(preferred stock). When a single class of share
capital is issued, it is an ordinary share capital.
Ordinary share capital entitles the holder to an
equal or pro-rata division of profits without any
preference or advantage over any class of shares.
Preference share capital entitles the holder to
enjoy priority as to distribution of dividends and
distribution of assets upon corporate liquidation.
Dividends are corporate profits distributed to its
shareholders.
All shareholders have the same basic rights.
These rights are as follows:
1. To share in the distribution of corporate
profit
2. To share in the distribution of assets upon
corporate liquidation
3. To vote in shareholders’ meeting
4. To maintain one’s ownership interest in the
corporation through purchase of additional
shares when a new share capital is issued. This is
called the preemptive right.
Both preference and ordinary share capital may
be issued with par, without par but with stated
value, or without par and without stated value.
- A par value share capital has a nominal or face
value stated on the face of the stock certificate
and in the articles of incorporation.
- A no-par but with stated value share capital
has a nominal value stated in the articles of
incorporation but not on the face of the stock
certificate.
- A no-par, no-stated value share capital has no
nominal value stated either in the articles of
incorporation nor on the face of the stock
certificate.
In our Corporation Code, a no-par share capital is
to be issued for a consideration of not less than
five pesos.
3.1 PREFERENCE SHARE CAPITAL
(PREFERRED STOCK)
A preference share capital is generally issued
with a par value and a dividend rate. The holders
of preference shares have priority as to
distribution of dividends and as to distribution of
assets in the event of corporate liquidation. This
does not mean, however, that the holders are
assured of regular receipt of dividends. This only
means that dividend requirements on preference
shares must first be met before any payment can
be made to holders of ordinary shares.
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A corporation may issue more than one class of
preference shares. Preference shares may be
classified as follows:
1. Cumulative preference shares – entitle
the holders to the receipt of previous years’
unpaid dividends (dividend in arrears) before
any payment can be made to ordinary
shareholders upon dividend declaration. This
means that if dividend is not declared in a
particular year, the right to such dividend is not
lost but carried forward to a subsequent year.
2. Non-cumulative preference shares –
entitle the holders to the receipt of current
dividends but not on the previous years’ unpaid
dividends. This means that if dividend is not
declared in a particular year, the right to such
dividend is lost.
3. Participating preference shares – entitle
the holders to the receipt of additional dividend
after holders of both preference and ordinary
shares have been paid up to the current year’s
dividend. This means that the holders of
preference shares have the right to share in extra
dividends.
Participating preference shares may be fully
participating or participating only up to a certain
amount of percentage.
4. Non-participating preference shares –
entitle the holders to the receipt of dividends up
to the current period only. All extra dividends are
given to holders of ordinary shares.
5. Convertible preference shares – entitle
the holders the option to exchange the shares for
some other securities of the issuing corporation,
normally ordinary shares.
6. Redeemable preference shares – entitle
the issuing corporation the option to redeem or
call the shares at a certain call price
3.2. ORDINARY SHARE CAPITAL (COMMON
STOCK)
An ordinary share capital or common stock
represents residual ownership equity. The
holders of this class of share capital carry the
greatest risk. However, the ordinarily share in
earnings to the greatest extent if the corporation
is successful.
4. AUTHORIZED SHARE CAPITAL
The maximum number of shares (both preference
and ordinary shares) that a corporation may
issue is termed as authorized shares. The
authorized share capital (authorized capital
stock) is determined by multiplying the
authorized shares by the par or stated value of
the share capital.
A corporation cannot issue shares more than the
authorized shares stated in the articles of
incorporation. However, it may increase its
authorized shares and authorized share capital
by amending its articles of incorporation.
Authorized share capital may be recorded under
the memorandum entry method.
Memorandum Entry Method
-> Authorized to issue xxx shares of xxx share
capital with a par value of Pxxx.
Illustrative Problem: The Emotional Company
was organized on January 1, 2021 with
authorized share capital as follows:
10,000 shares of 10% preference share
capital with a par value of P100 per share
200,000 shares of ordinary share capital
with a par value of P10 per share
The entries to record authorized share capital
are:
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Jan. 1, 2021 Authorized to issue 10,000
shares of 10% preference share capital with a par
value of P100 per share.
1 Authorized to issue 200,000
shares of ordinary share capital with a par value
of P10 per share.
5. ISSUANCE OF SHARE CAPITAL
A share capital may be issued in exchange for
cash, non-cash assets, services, liability or other
form of securities. It may also be sold on a
subscription basis.
A share capital that is issued to a shareholder is
called an outstanding share.
5.1. ISSUANCE OF PAR VALUE SHARE
The following rules shall apply in the issuance of
this class of share capital.
5.1.1 ISSUANCE FOR CASH. A share capital may
be issued for cash equal to its par value or above
par value. If cash is received equal to its par
value, Cash is debited and Share Capital is
credited.
If the share capital is sold issued above its par
value, Cash is debited for the amount received,
Share Capital is credited at par value, and Share
Premium or Paid in Capital in Excess of Par is
credited for the excess of cash received over par
value.
Illustrative Problem: The Smiley Corporation
was organized on January 1, 2021 and is
authorized to issue 100,000 shares of P10 par
value ordinary shares. Subsequently, 25,000
shares were sold.
The entries to record the sale of shares using two
independent cases are presented as follows:
5.1.2 ISSUANCE IN EXCHANGE FOR NON-CASH
ASSETS OR PROPERTY. When a share capital is
issued in exchange for non-cash assets, the asset
received is recorded at its fair value (direct
measurement), unless the fair value cannot be
estimated reliably. If the fair value of the asset
received cannot be estimated reliably, it will be
recorded at the fair value of the share capital
issued (indirect measurement). The fair value of
the asset received shall be determined at the date
the entity receives the asset.
Illustrative Problem: The Smiley Corporation
issued 10,000 shares of its P10 par ordinary
share capital in exchange for land.
Case 1 – The issuance price is P10 (at par)
Cash 250,000
Ordinary Share Capital 250,000
Case 2 – The issuance price is P15 (above par)
Cash 375,000
Ordinary Share Capital 250,000
Ordinary Share Premium 125,000
5.1.3 ISSUANCE IN EXCHANGE FOR SERVICES
RENDERED. When a share capital is issued in
exchange for services rendered, the services
received is recorded at its fair value (direct
measurement). If the fair value cannot be
estimated reliably, it will be recorded at the fair
value of the share capital issued (indirect
measurement). The fair value of the services
received shall be determined at the date the other
party renders the services.
Illustrative Problem: The Smiley Corporation
issued 1,000 shares of P10 par ordinary share
capital in payment for the services of the lawyer
rendered during incorporation.
Case 1 – The land has a fair value of P175,000
Land 175,000
Ordinary Share Capital 100,000
Ordinary Share Premium 75,000
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 Case 2 – The land has no known market value. The fair
value of ordinary share capital on the date of exchange
is P15.
Land 150,000
Ordinary Share Capital 100,000
Ordinary Share Premium 50,000
5.1.4 SALE OF SHARE CAPITAL ON A
SUBSCRIPTION BASIS. Subscription is a contract
between a subscriber (buyer of share capital) and
a corporation (seller or issuer of share capital)
whereby the former purchases shares of stock of
the latter with the payment to be made at a later
date. The corporation issues the corresponding
stock certificate upon full payment of
subscription.
Sale of share capital on a subscription basis
involves three major transactions – receipt of
subscription, collection from subscribers, and
issuance of stock certificate upon full payment of
subscription.
It should be noted that the Share Capital Subscribed
account is always credited at par value, regardless of
the subscription price.
Illustrative Problem: On June 3, 2021, the
Smiley Corporation received subscription for
5,000 shares of its P10 par value ordinary share
capital at P15. A down payment of 25% was
received and the balance was paid in full on July
4, 2021. The following are the entries to record
these transactions:
5.2. ISSUANCE OF NO-PAR BUT WITH STATED
VALUE SHARE CAPITAL
The same rules discussed in the issuance of share
capital with a par value are applicable. The
account Share Capital in Excess of Stated Value
may be used instead of the account Share
Premium or Share Capital in Excess of Par.
5.2.1 ISSUANCE FOR CASH
Illustrative Problem: The Smiley Corporation
was organized on January 1, 2021 and is
authorized to issue 100,000 shares P10 stated
value ordinary share capital. Subsequently,
25,000 shares were sold.
The entries to record the sale of share capital
under two independent cases are as follows:
Case 1 – The issuance price is P10 (stated value)
Cash 250,000
Ordinary Share Capital 250,000
Case 2 – The issuance price is P15 (above stated
value)
Cash 375,000
Ordinary Share Capital 250,000
Ordinary Share Capital in
125,000
Excess of stated Value
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5.2.2 ISSUANCE IN EXCHANGE FOR NON-CASH 5.2.4 SALE OF SHARE CAPITAL ON A
ASSETS OR PROPERTY SUBSCRIPTION BASIS. The sale of stock with
stated value on a subscription basis is recorded in
Illustrative Problem: The Smiley Corporation the same manner as that of a stock with a par
issued 10,000 shares of its P10 stated value value. However, the account Share Capital in
ordinary share capital in exchange for land. The Excess of Stated Value is credited instead of Share
entries to record the issuance of share capital Premium or Share Capital in Excess of Par.
under two independent cases are as follows:
Illustrative Problem: On June 3, 2021, the
Case 1 – The land has a fair value of P175,000 Smiley Corporation received subscription for
Land 175,000 5,000 shares of its P10 stated value ordinary
Ordinary Share Capital 100,000 share capital at P15. A down payment of 25% was
Ordinary Share in Excess of received and the balance was paid in full on July
75,000
Stated Value 4, 2021.

Case 2 – The land has no known market value. The The entries to record these transactions are as
fair market value of ordinary share capital on the follows:
date of exchange is P15.
Land 150,000
Ordinary Share Capital 100,000
Ordinary Share Capital in
50,000
Excess of Stated Value

5.2.3 ISSUANCE IN EXCHANGE FOR SERVICES

RENDERED

Illustrative Problem: The Smiley Corporation

issued 1,000 shares of P10 stated value ordinary
share capital in payment for the services of the
lawyer rendered during incorporation.
5.3. ISSUANCE OF NO-PAR, NO-STATED VALUE
Case 1 – The services of the lawyer is valued at SHARE CAPITAL
P25,000.
Pre-Operating Expenses 25,000 When a share capital has no par value and no
Ordinary Share Capital 10,000 stated value, the value assigned to the
Ordinary Share Capital in consideration received is the same amount
15,000
Excess of Stated Value credited to the Share Capital account.

5.3.1 ISSUANCE FOR CASH. When a no-par, no-

Case 2 – There is no known market value for the
stated value stock is issued for cash, Cash is
services. The fair market value of the ordinary share
capital issued is P15 per share. debited and Share Capital is credited for the value
Pre-Operating Expenses 15,000 of the cash consideration received.
Ordinary Share Capital 10,000
Illustrative Problem: The Smiley Corporation
Ordinary Share Capital in
5,000 was organized on January 1, 2021 and is
Excess of Stated Value
authorized to issue 100,000 shares of no-par, no-

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stated value ordinary share capital. Subsequently, Pre-Operating Expenses 15,000
25,000 shares were sold at P15 per share. Ordinary Share Capital 15,000

Cash 375,000
Ordinary Share Capital 375,000
5.3.4 SALE OF SHARE CAPITAL ON A
SUBSCRIPTION BASIS. The sale of no-stated
value share capital on a subscription basis is
recorded in the same manner as that of share
5.3.2 ISSUANCE IN EXCHANGE FOR NON-CASH capital with a par value or stated value, except
ASSETS OR PROPERTY that the entire subscription price is credited to
the Share Capital account.
Upon issuance of the shares, Share Capital is
credited for the value assigned to the asset Illustrative Problem: On June 3, 2021, the
received. Smiley Corporation received subscription for
5,000 shares of its no-par, no stated value
Illustrative Problem: The Smiley Corporation ordinary share capital at P15. A down payment of
issued 10,000 shares of its ordinary share capital 25% was received and the balance was paid in
in exchange for land. full on July 4, 2021.

Case 1 – The land has a market value of P175,000 The entries to record these transactions are as
Land 175,000 follows:
Ordinary Share Capital 175,000

Case 2 – The land has no known market value. The

fair market value of ordinary share capital on the
date of exchange is P15.
Land 150,000
Ordinary Share Capital 150,000

5.3.3 ISSUANCE IN EXCHANGE FOR SERVICES

RENDERED
Illustrative Problem: The Smiley Corporation
issued 1,000 shares of its ordinary share capital
in payment for the services of the lawyer
rendered during incorporation.
Case 1 – The services of the lawyer is valued at
P25,000.
Pre-Operating Expenses 25,000
Ordinary Share Capital 25,000
Case 2 – There is no known market value for the
services. The fair market value of the ordinary share
capital issued is P15 per share.
6. SUBSCRIPTION DEFAULTS
When a subscriber fails to pay his obligations
after the corporation has sent several notices to
him, his subscribed shares are declared
delinquent shares. His subscription is declared
delinquent subscription. Such delinquent
subscription is then offered for sale in a public
auction and delinquent shares are issued to the
highest bidder. The highest bidder is the one who
is willing to pay for the unpaid subscription plus
any expense incurred in connection with the
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delinquency sale and is willing to receive the
least number of shares.
The entries to record the foregoing transactions
The following entries are made in relation to follow:
subscription defaults and issuance of stock
certificates.

All subscribed shares are issued. Shares are first

given to the highest bidder. The excess, if any, are
given to the defaulting subscriber.

If there is no bidder, all of the delinquent shares

will be issued in the name of the corporation.
Such shares are considered treasury shares and
the following entries will be made, after making
the entries (a) and (b) above:

Illustrative Problem: On June 15, 2021, The

Smiley Corporation received subscription for
2,000 shares of its P10 par value ordinary share
capital of P15. A down payment of 60% was
received. The final payment was due on August
15, 2021, although several notices were sent to
the subscriber, no payment has been received. On
August 31, the subscription was declared
delinquent and was offered for sale in a public
auction. On September 6, expenses of P500 were
incurred in connection with the delinquency sale.
On September 21, payment was received from
the highest bidder and shares were issued –
1,500 to the highest bidder and 500 to the
defaulting subscriber.

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CORPORATE OPERATIONS
LESSON 3
ACCOUNTING CYCLE OF A CORPORATION
The accounting cycle of a corporation is
essentially the same as that of a sole
proprietorship and a partnership. Transactions
are recorded in the same manner as that of the
other two forms of business organizations.
Financial statements are the end product of the
accounting process. PAS 1 provides that a
complete set of financial statements shall be
composed of the following:
1. Statement of financial position (balance
sheet)
2. Statement of comprehensive income
3. Statement of changes in equity
4. Statement of cash flows
5. Notes
STATEMENT OF FINANCIAL POSITION OF A
CORPORATION
The balance sheet reports the financial condition
of a company as of a particular date. The equity
section of the statement of financial position of a
corporation is called shareholders’ equity or
stockholders’ equity and is generally composed
of Contributed Capital and Retained Earnings.
CONTRIBUTED CAPITAL. The contributed capital
represents corporate capital arising from
investment by shareholders. It is further divided
into two sections:
1. Share capital or capital stock – this is also
known as legal capital. This section reports both
preference (preferred) and ordinary (common)
share capital issued, subscribed and distributable
as dividends, stated at par or stated value. In case
of share capital without par nor stated value, the
amount reported is the total value of the
consideration received in exchange for the
shares.
Share capital subscription receivables that are
not currently collectible are shown as a deduction
from share capital subscribed.
2. Additional Paid-in Capital – this section
reports investment by shareholders in excess of
the par value or stated value of the share capital.
It includes paid-in capital in excess of par value or
stated value (share premium) of both preference
and ordinary share capital.
RETAINED EARNINGS (EARNED SURPLUS). The
Retained Earnings balance represents
undistributed earnings of the corporation. It
represents capital of the corporation arising from
its operations. The balance of the account is
generally divided in to two parts:
1. Appropriated Retained Earnings – it is the
portion of Retained Earnings set aside for a
specific purpose.
2. Unappropriated Retained Earnings – it is
the portion of Retained Earnings available for
distribution as dividends to the shareholders. It is
normally described as “unrestricted earnings”.
The Retained Earnings account has a normal
credit balance. A debit balance in the account is
called a deficit.
DIVIDENDS
Dividends are distribution to shareholders of
corporate earnings in proportion to the number
of shares held by them. Distributions may take
the form of (1) cash, (2) non-cash assets, (3)
notes or other evidence of corporate
indebtedness, (4) shares of the company’s own
share capital.
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Dividends described are paid out of accumulated
earnings of the corporation. They may also be
paid as a return of shareholders’ invested capital.
This type of dividend is called liquidating
dividend.
The power to declare dividends is vested upon
the board of directors.
The following dates are essential in formal
dividend announcement:
1. Date of declaration – this is the date when
the board of directors approved the resolution to
distribute dividends. The liability of the
corporation to the shareholders is recorded on
this date.
2. Date of shareholders of record – this is
the date when the company determines the
shareholders who are entitled to the receipt of
the declared dividends. No entry is required on
this date. However, a list of registered
shareholders is made as of the close of business
on this date. Share capital are selling dividends-
on prior to this date and are selling ex-dividends
the day following this date.
3. Date of payment or distribution – this is
the date when the dividends declared are paid or
distributed to the shareholders. The liability
recognized on the date of declaration is cancelled
or extinguished on this date.
TYPES OF DIVIDENDS
1. Cash dividend – payment is in the form of
cash
2. Share capital dividend (stock dividend) –
payment is in the form of corporation’s own
share capital
3. Property dividend – payment is in the
form of noncash assets as inventories and share
capital of other corporations.
4. Scrip dividends – a deferred cash dividend,
consists of a written promise to pay at some
future date including interest.
5. Liquidating dividend – represents return
of capital to shareholders, a violation of Trust
Fund Doctrine.
Trust Fund Doctrine – the share capital of the
corporation is considered as trust fund for the
protection of the creditors, hence, it is illegal to
return the legal capital to the shareholders during
the lifetime of the corporation.
CASH DIVIDENDS
Cash dividends are dividends that are
distributable in the form of cash. This is the most
common type of dividend. The following entries
are made to record the declaration and the
subsequent payment:
If the dividends declared are still unpaid as of the
statement of financial position date, the balance
of the account Cash Dividends Payable is
reported as a current liability.
The amount of cash dividends declared should
not exceed the amount of cash reported on the
statement of financial position or cash needed for
current operations.
Cash dividends may either be:
1. Peso Dividend – a cash dividend expressed
in peso amount. The peso dividend multiplied by
the number of outstanding shares of the
corporation equals the total amount of Retained
Earnings declared as cash dividends. The peso
dividend multiplied by the number of capital
shares held by a shareholder equals the total
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amount of cash dividends to be received by the
shareholder.
2. Percentage dividend – a cash dividend
expressed in percentage. The dividend
percentage multiplied by the par value or stated
value of the capital share equals the peso
dividend.
Illustrative Problem: Summer Corp. has 10,000
shares of P100 par value ordinary share capital
outstanding as of December 1, 2021. On this date,
the Board of Directors declared a cash dividend of
P10 per share to shareholders of record of
December 30, 2021 payable on January 15, 2022.
The Dividends Payable account would be
reported in the December 31, 2021 statement of
financial position as a current liability.
SHARE CAPITAL DIVIDENDS (STOCK
DIVIDENDS)
A share capital dividend (stock dividend) is a
distribution to shareholders in the form of the
corporation’s own share capital.
This type of dividend does not affect total assets
and total shareholders’ equity, it simply
represents a transfer of capital from retained
earnings to contributed capital. Therefore, total
shareholders’ equity before and after the
declaration and distribution of share capital
dividends are the same. Retained Earnings is
decreased while contributed capital is increased
as a result of the declaration and distribution of
share capital dividends.
In recording the declaration of a share capital
dividend, a distinction should be made between a
small and large stock dividend. A share capital
dividend representing less than 20% of the
outstanding shares is considered a small share
capital dividend. A share capital dividend
representing 20% or more of the outstanding
shares is considered a large share capital
dividend.
Under a small share capital dividend, retained
earnings is debited for the fair value of the share
capital on the date of declaration; under a large
share capital dividend, retained earnings is
debited for the par or stated value of the share
capital.
The entries to record the declaration and
distribution of share capital dividends follow:
Small Share Capital Dividend
Large Share Capital Dividend
The account Share Capital Dividend Distributable
is credited for the par value or stated value of the
shares to be distributed regardless of whether
the share capital dividend is small or large. The
account is reported on the statement of financial
position under the shareholders’ equity section
as part of Contributed Capital. It is properly
shown as an addition to the share capital
outstanding.
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The account Paid-in Capital from Share Capital
Dividend is credited for the excess of the fair
market value of the share over its par or stated
value. This account is reported on the statement
of financial position under the shareholders’
equity section as part of additional paid-in
capital.
Illustrative Problem: Summer Corp. has 10,000
shares of P100 par value ordinary share capital
outstanding as of December 1, 2021. On this date,
the Board of Directors declared a share capital
dividend distributable to shareholders of record
of December 30, 2021 payable on January 15,
2022. The fair market value of Summer Corp.
share capital on December 1 is P105; on
December 30, P110; on January 15, P106.
The entries to record the declaration and
distribution of share capital dividend using two
independent cases are presented below:
Case 1 – A share capital dividend of 10% was
declared.
Case 2 – A share capital dividend of 30% was
declared.
The declaration and distribution of share capital
dividends, whether small or large, increase the
number of capital shares outstanding.
In the two different types of dividends discussed,
it should be noted that only the outstanding
capital shares are entitled to dividends.
DIVIDENDS ON PREFERENCE SHARES
When dividends are paid, the dividend
requirements on preference shares must be paid
before any payment can be made to ordinary
shareholders. The required dividends depend
upon the type of preference shares issued by the
corporation.
The preference shares may be:
1. Cumulative – preference shareholders are
entitled to the payment of past years’ unpaid
dividends or dividends in arrears before the
payment of current year’s dividends.
2. Noncumulative – preference shareholders
are not entitled to payment of dividends in
arrears. They are entitled to current year’s
dividends only.
3. Participating – preference shareholders
are entitled to additional dividends after the
payment of regular dividends to both the
preference and ordinary shareholders.
If the preference shares are fully participating,
then the excess dividend is allocated
proportionately to the two classes of share
capital based on their total par value.
4. Non-participating – preference shareholders
are not entitled to any dividend in excess of the
regular rate. The dividends on preference shares
is limited only to the regular rate even if the
amount of dividend distributions increases. The
entire dividend balance after the preference
shareholders get their regular dividend rate is
given to the ordinary shareholders.
Illustrative Problem: The Summer Corp.
declared and paid cash dividends for the last
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 three years as follows: 2018 – P120,000; 2019 –
P200,000; 2020 – P300,000. No dividends were
paid for two years prior to 2018. The capital
structure of the company for the last three years
follows:

10% Preference share capital, P100 par,

5,000 shares outstanding P500,000

Ordinary share capital, P50 par, 5,000

shares outstanding 250,000

The annual dividend requirement on preference shares is P50,000 or P10 per share (P100 par x 10% x
5,000 shares outstanding). At the beginning of 2018, dividends are in arrears for two years.

The distribution of dividends to the preference and ordinary shareholders under different independent
cases are presented below:

Case 1 – The preference shares are noncumulative and nonparticipating.

Case 2 – The preference shares are cumulative but nonparticipating.

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Case 3 – The preference shares are noncumulative but fully participating.

Case 4 – The preference shares are cumulative and fully participating.

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