CHAPTER

ACCOUNTING FOR
CORPORATIONS
CORPORATE FORM OF ORGANIZATION
• A corporation is artificial person
a legal entity , created by law
that is separate and distinct from its
owners
• Corporations are classified as:
• Publicly-held corporations (not for
profit corporation) and
• Privately-held corporations (profit
corporation).
 CHARACTERISTICS
 Limited liability of shareholders
 Transferable ownership rights
 Ability to acquire large capital
 Continuous life
 Separation of management from ownership
 Government regulations
 Double taxation
 Separate legal existence
 ADVANTAGES AND DISADVANTAGES
OF A CORPORATION
Advantages Disadvantages

 Managed by professional  Separation of ownership from

managers
 Separate legal existence
 Limited liability
 Transferable ownership rights
 Ability to acquire large capital
management
 High government regulations
 Double taxation
 High formation costs

 Continuous life
 ORGANIZATION COSTS
• Organization costs are costs incurred in
forming a corporation
• These costs include:
fees to underwriters,
legal fees,
incorporation fees, and
promotional expenditures.
• These costs are charged to an intangible
asset called organization costs.
 Rights to Shareholders
• Voting right— shareholders participate in
management indirectly by voting at the
stockholders’ meeting.
• Dividend rights— to share in profits by receiving
dividends declared by the BOD
• Preemptive rights— refer to the right to maintain
their percentage of ownership
• The right to receive assets upon liquidation in
proportion to the number of shares owned.
 Corporate Financial Statement
1. Income Statement
• Very similar to those of unincorporated businesses
but income tax expense occurs in a corporation
2. Statement of Retained Earnings
• Measures changes in retained earnings over a
specific period of time.
• Net income increases retained earnings. Dividends,
net losses, and some treasury stock transactions
decrease retained earnings.
• Net income and dividends are closed to retained
earnings
 Corporate Financial Statement
3. Balance Sheet:
• Identical to other businesses except for the
equity section.
• The shareholders’ equity section of a
corporation’s balance sheet consists of:
1. Paid in capital: capital contributed by shareholders
• Share capital
• Additional paid in capital
2. Retained earnings: profit earned retained
 Paid-in capital
• The main source of paid-in capital is from issuing
stock.
• The two primary classes of stock are common stock
and preferred stock.
1. Common Stock
• Has the four basic rights previously mentioned. It
represents the basic ownership interest
2. Preferred Stock
• Usually carries certain benefits not available to
common stockholders.
 Paid-in capital
• Generally, Preferred shares have priority over
common shares with regards to:
1. Dividends and
2. Assets in the event of liquidation
• Preferred shareholders usually do not have voting
rights
• Preferred shares are shown first in the share
capital section of shareholders' equity
 Types of Preferred stocks
• Preferred stocks can be:
1. Cumulative or non cumulative
2. Participating or non participating
 Cumulative PS : Preferred shareholders are paid
both current and prior year dividends before
common shareholders receive any dividends.
• Preferred dividends not declared in a given period
are called dividends in arrears.
 Noncumulative PS— no right of dividend in arrear
 Types of Preferred stocks ...
 Participating PS — Gives its owners the
right to share in dividends in excess of the
stated percentage or amount.
 Nonparticipating PS— Dividends are
limited each year to a maximum amount
which is either a percentage par value or a
specified amount.
 Issuance of Stocks
• Authorized stock― it is the maximum number of shares that the
corporation can issue (sell) as designated in its charter
• Issued Stocks― the number of shares transferred to stockholders

• Unissued stocks— stocks authorized but not yet issued.

• Outstanding stock― Issued stock that is held by stockholders

and has not been bought back by the corporation.
• Treasury stock― Issued stock that has been bought back by the
company.
 Treasury Stocks
• Treasury Stocks :

 Are shares that have been issued and then

reacquired by the corporation.
 Are shares held for later reissue.

Are reported as a reduction in SHE section

next to retained earnings
Thanks
for all