Corporations: Share Capital,

Retained Earnings, and

Financial Reporting

Module 12 - Chapter 15
Overview of Shareholders’ Equity
Owners’ equity of a corporation’s statement of financial
position (balance sheet) is called Shareholders’ equity.
2 components of of Shareholders’ equity (SE):
● Share Capital (contributed or paid-in capital)-reflects
amount of resources received as investments, donations
or other share capital transactions
● Retained Earnings- (or accumulated profits or losses) is
the amount of capital accumulated and retained through
the profitable operation of the business.
The following is the shareholders equity of a statement of
financial position: refer to page 15-2
Shareholders’ Equity
Share Capital
Preference Shares-P50 par, 1,000 shares authorized,
Issued and outstanding P 50,000
Ordinary Shares-P5 par, 30,000 shares authorized,
20,000 shares issued and outstanding P100,000
Share Premium-Ordinary 50,000 150,000
Total Share Capital P200,000

Retained Earnings 80,000

Total Shareholders’ Equity P280,000

Share Capital-
It is shares to be subscribed and paid in or secured to be
paid in by the shareholders in money, property or services
at the time of organization of the corporation or afterwards,
and upon which it is to conduct operations.
The share, contributed or paid in capital are divided into:
Legal Capital-in case of par value,it is aggregate par value
of all issued and subscribed shares. In case of no-par, it is
total consideration received for issuance of shares to
stockholders including excess of issue price over stated
value (Section 6, par 3, Corp. Code of the Phils.)
Share Capital-
Share Premium-(or Additional Paid-in Capital) It
is a portion of paid-in capital representing
amounts paid by shareholders in excess of par. It
may result from transactions involving treasury
stocks, retirement of shares, donated capital,
share dividends and any other “gain’ on the
corporation’s own stock transactions
 Two Basic Types of Shares
Share capital is divided into transferable shares of stock (interest or
right of a stockholders in a corporation and evidence by certificate of
stock.
Ordinary Share- represents the basic ownership class of the
corporation. When only one class of share is issued, it must be
ordinary share. Ordinary shares are the entity’s residual equity.
Preference Share-gives its owners certain advantages over ordinary
shareholders. These special benefits relate either to receipt of
dividends when declared before ordinary shareholders (preferred as to
dividends) or to priority claims on assets in the event of corporate
liquidation (preferred as to assets).
 Terms Related to Share Capital
Authorized Share Capital-The number of authorized shares indicates the
maximum number of shared the corporation can issue as specified in the article
of incorporation.

Issued Share Capital-shares sold and paid in full and may include treasury
shares.

Subscribed Share Capital-portion of authorized share capital that has been

subscribed but not yet fully paid.

Outstanding Share Capital- issued shares in the hands of shareholders.The

number of outstanding shares is equal to the difference between issued shares
and treasury shares.

Treasury Stock- issued shares acquired by the corporation but not retired and
therefore awaiting to be reissued at a later date.
 Accounting For Issuance of Share Capital
The entry to record the issuance of share capital depends on whether the
stock is with or without par value.
● When par value shares are sold, proceeds are credited to share capital
account at par value of shares with the excess reflected as share
premium
● When without par shares are sold, proceeds are credited to share
capital account in full. If no par stock has stated value, the excess
proceeds over stated value may alternately be credited to share premium
Section 65 of the Corporation code prohibits original issue of share capital (or
capital stock) for consideration less than par or stated value (i.e.issued at a
discount).
Corporations set the par value of ordinary shares at nominal amounts such
as P1 per share. The par value is no indication of market value, it merely
indicates the amount per share to be entered in the share capital account.
 Considerations For Issuance of Shares
Share capital may be issued in exchange for any of the following:
1. Actual cash paid to the corporation
2. Tangible or intangible properties actually received by the corporation
3. Labor already performed for or services actually rendered to the corp.
4. Previously incurred indebtedness by the corporation
In issuing share capital, a corporation may avail the services of an
investment banker who is a specialist in marketing shares to investors on
a best effort basis.
Accounting for share issue costs like preparing, printing and filing the
relevant documentation and marketing the shares is covered by
paragraph 37 of IAS no. 32, Financial Instruments Presentation:...The
transaction costs of equity transaction are accounted for as a deduction
from equity...
Accounting for Corporation: Please refer to video clips 1, 2,
3 4, 5 and 6 for the following topics:
1. Share Capital-cash consideration
2. Non-cash consideration
3. Subscription of shares
4. Treasury shares
5. Retained earnings
6. Share dividends.

Finally refer to pp 15-18 to 15-20 for the Statement of

Retained Earnings and the Statement of Changes in Equity.
The End