corporation accounting - introduction

7/29/2019 Corporation Accounting - Introduction

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INTRODUCTION TO CORPORATION ACCOUNTING

Corporation – an artificial being created by operation of law having

the rights of succession and the power, attributes and propertiesexpressly authorized by law or incident to its existence.

Characteristics of a Corporation

1. Separate legal entity – A corporation is an artificial being with apersonality separate from that of its individual owners.

2. Created by operation of law – A corporation is generally createdby operation of law. The mere agreement of the parties cannotgive rise to a corporation.

3. Rights of succession – A corporation continues to existnotwithstanding the withdrawal, death, insolvency or incapacity

of the individual owners. Changes in the ownership structure donot dissolve a corporation.

4. Powers, attributes, properties expressly authorized by law –Being a creation of law, a corporation can only exercise powersprovided by law and powers which are incidental to its existence.

5. Ownership divided into shares – Proprietorship in a corporation isdivided into units known as shares of stocks.

6. Board of Directors (BOD) – Management of the business is vested

in a board of directors elected by the stockholders. The BOD isthe governing body or decision-making body of the corporation.

Comparison between Partnership and CorporationPartnership Corporation

Formed by 2 persons. Formed by 5 persons

Starts with agreement amongpartners; may be formed orally.

Starts with the issuance of acertificate of incorporationissued by SEC

Unlimited liability Limited liability

Limited life Unlimited life

Transfer of equity of a partnerneeds the consent of otherpartners.

Shares can be transferred fromone shareholder to anotherwithout getting the consent of the

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other shareholders.

Partner is an agent of thepartnership.

Shareholders do not act as agentsof the corporation.

Advantages of a Corporation

1. The corporation’s power of succession enables it to enjoy acontinuous existence.

2. The continuity of corporate existence enables it to obtain astrong credit line.

3. Bigger source of capital may be raised because many individualsinvest funds in the corporation.

4. Shareholders enjoy limited liability. Their liability to corporatedebts extends only to their investment in the corporation.

5. Shares of stocks may be transferred without the consent of theother shareholders.

Disadvantages of a Corporation

1. It is not easy to form because of complicated legal anddocumentary requirements.

2. The limited liability of the shareholders weakens or limits its

credit capacity.

3. It is subject to more governmental requirements.

4. There is possibility of abuse of power by the Board of Directors.

5. It is subject to more taxes.

Types of Corporation

1. Public – a corporation formed to render

government service

2. Private – a corporation formed for a privatepurpose, aim or benefit.

3. Quasi-public – a private corporation which isgiven a franchise to perform functions of apublic character.



4. Domestic – a corporation that is organizedunder Philippine laws.

5. Foreign - a corporation that is organizedunder the laws of other countries.

6. Stock – a corporation in which the capital isdivided into shares of stock and isauthorized to distribute dividends to theholders of such shares. A stock certificateis a physical evidence of the shares of stock.Stock corporations are generally profit-oriented.

7. Non-stock - a corporation in which capitalcomes from fees or contributions given byindividuals. No part of its income is

distributed as dividends and any profit shallbe used to further the purpose(s) of thecorporation. Non-stock corporations aregenerally non-profit in nature.

8. Open – a corporation whose ownership iswidely held by many investors.

9. Closely held or family – a corporation inwhich 50% or more of its stock is owned byfive persons or less.

Components of a Corporation

1. Incorporators – personswho originally formed thecorporation and whosenames appear in theArticles of Incorporation. They must be 5 but notmore than 15 naturalpersons. They should not

artificial persons.

2. Stockholders or shareholders – owners of astock corporation.

3. Members – persons whogave fees or contributions

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to a non-stockcorporation.

4. Corporators – persons whocompose the corporationwhether as stockholdersor members.

5. Promoters – persons whoundertake the necessarysteps and procedures toorganize the corporation.

6. Subscribers – persons whoagreed to buy shares of stock but will pay at alater date.

7. Underwriters – personswho undertake to sell theshares of stocks to thegeneral public.

Organizing a Corporation

The process of organizing a corporation consists of three stages:

1. Promotion – makes preliminaryarrangements and solicits subscription to

raise sufficient capital for the business. Thefollowing are the pre-incorporationrequirements:

o At least 25% of the authorized share capital must be

subscribed.

o At least 25% of total subscriptions must be paid.

2. Incorporation – formalizes organization of the corporation byfiling with SEC the necessary documentary requirements such asarticles of incorporation and treasurer’s affidavit attestingcompliance to the pre-incorporation requirements. Uponapproval, SEC issues a certificate of incorporation, the date of which is considered as the date of registration or incorporation.

3. Commencement of the business – the business should start itsbusiness within two years from the date of incorporation.



Costs incurred in connection with the formation of the corporation arerecorded as expense. Examples of organization costs are filing fees,

cost of printing stock certificates, promoters’ commission and legalfees. The following account titles may be used in recordingorganization costs:

Pre-operating Costs

Pre-operating Expenses

Organization Expense

Organization Costs

Articles of Incorporation

The Articles of Incorporation enumerates the powers and limitations conferred upon the corporation by the government .It includes the following information:

1. The name of the corporation;2. The purpose or purposes for which the corporation is formed;3. The place of the principal office of the corporation;4. The term of existence of the corporation, not exceeding 50

years;5. The names, nationalities and addresses of the incorporators;6. The names of the directors who will serve until their successors

are duly elected and qualified in accordance with the by-laws;7. The authorized share capital , the classes of shares to be issued

and the number of each class of share indicating the par value if there is any;

8. The amount of subscription to the share capital , the names of the subscribers and the number of shares subscribed by each;

9. The total amount paid on the subscriptions and the amount paidby each subscriber on his subscription.

By-Laws

The by-laws of a corporation contain provisions for the internal administration of the corporation. The by-laws should be filedwithin one month from the date of issuance of the certificate of incorporation. The by-laws normally include the following:

1. The date, place and manner of calling the annual shareholders’meeting;

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2. The manner of conducting meetings;3. The circumstances which may permit the calling of special

meetings of the shareholders;4. The manner of voting and the use of proxies;5. The manner of electing the directors;6. The term of office of the directors;7. The authority and duties of the directors;

8. The manner of selecting the corporate officers;9. The procedures for amending the articles of incorporation andby-laws.

Corporate Books and Records

The corporation generally maintains the following books of accounts and

records:

1. Journals and Ledgers;

2. Minute books for meetings of shareholders;3. Minute books for meetings of Board of Directors;4. Stock and Transfer Book - contains records of all stocks, names

of stockholders, amount paid and unpaid, any sale or transfer of stock.

Kinds of Shares

1. Par Value –a share of stock that is given a definite or fixed valuein the articles of incorporation.

2. No Par Value – a share of stock that has no fixed value; it maynot be issued for less than P5.

3. Common or Ordinary shares –the basic issue of shares. Thecommon or ordinary share entitles the holder to the followingbasic rights:

a. Right to vote in shareholders’ meeting;b. Right to share in corporate profits (dividends);c. Right to share in corporate assets upon liquidation;d. Right to purchase additional shares of stocks in the event

that the corporation increases its share capital (pre-emptive right).

4. Preferred or Preference share - entitles the holder to somespecific preferences over the common or ordinary share such as

a. Preference as to payment of dividends;b. Preference as to distribution of assets upon liquidation.



Terms Peculiar to a Corporation1. Authorized shares – refers to the maximum number of shares

which a corporation may issue (as set forth in the Articles of Incorporation).

2. Issued shares – shares which are issued to shareholders which atpresent may or may not be in the hands of the shareholder.

3. Unissued shares – shares which have never been issued and are

available for issuance.4. Outstanding shares – shares of stocks issued to shareholders orsubscribers whether fully or partially paid except for treasuryshares.

5. Treasury shares - shares which have been issued and fully paidfor but subsequently reacquired by the issuing corporation.

6. Subscribed shares – shares which investors have contracted toacquire.

March 2013

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corporation accounting - introduction

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