ACCOUNTING FOR

CORPORATIONS
Share Capital
OVERVIEW
3 types of business organizations and their
respective capital accounts:
1. Sole proprietorship – capital or owner’s equity
2. Partnership – partners’ capital or partners’
equity
3. Corporation – shareholders’ equity or
stockholders’ equity
OVERVIEW
• Corporations separately report contributed
capital and accumulated profits in accordance
with some legal provisions.
• The owners’ equity section of a corporation’s
statement of financial position is called
shareholders’ equity.
• Shareholders’ equity or stockholders’
equity is the residual interest of owners in the
net assets of a corporation measured by excess of
assets over liabilities.
2 Major Components of Shareholders’
Equity
• Share capital (contributed or paid-in capital)
reflects the amount of resources received by a
corporation as a result of investment by
shareholders, donations or other share capital
transactions.
• Retained earnings (accumulated profits or
losses) is the amount of capital accumulated and
retained through the profitable operations of the
business.
EXAMPLE OF SHAREHOLDERS’ EQUITY
IN A STATEMENT OF FINANCIAL
POSITION
SHARE CAPITAL
• It is the shares to be subscribed and paid in or
secured to be paid in by the shareholders, either in
money, property or services, at the time of
organization of the corporation or afterwards, and
upon which it is to conduct its operations.
• Legal capital:
▫ Capital contributed by shareholders comes from the
sale of shares of stock.
▫ Portion of the contributed capital or the minimum
amount of paid-in capital, which must remain in the
corporation for the protection of corporate creditors.
SHARE CAPITAL
• The amount of legal capital is determined as follows:
▫ In case of par value shares, legal capital is the aggregate par
value of all issued and subscribed shares.
▫ In case of no-par shares, legal capital is the total
consideration received by the corporation for the issuance
of its shares to the shareholders including the excess of
issue price over the stated value (Section 6, par. 3,
Revised Corporation Code of the Philippines).
• Share premium (or Additional Paid-in Capital):
▫ The portion of the paid-in capital representing amounts
paid by shareholders in excess of par.
▫ It may also result from transactions involving treasury
stocks, retirement of shares, donated capital, share
dividends and any other “gain” on the corporation’s own
stock transactions.
Common sources of share premium
• Excess over par value or stated value
• Resale of treasury shares at more than cost
• Donated capital
• Issuance of detachable share warrants
• Distribution of stock dividends
• Quasi-reorganization and recapitalization
TWO BASIC TYPES OF SHARES
• A share of stock represents the interest or right of a
shareholder in a corporation and is evidenced by a
certificate of stock.
• Ordinary share:
▫ The basic ownership class of the corporation.
▫ Ordinary shares are the entity’s residual equity.
• Preference share:
▫ These special benefits relate either to the receipt of
dividends when declared before the 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 shares the corporation can issue as specified in
the article of incorporation. This maximum number
of shares when multiplied by the par value of the
share will yield the authorized share capital.

NOTE: Any increase or decrease in the authorized

share capital requires prior approval of the SEC and
formal amendment to the articles of incorporation.
TERMS RELATED TO SHARE CAPITAL
• Issued share capital: these are shares which
have been sold and paid for in full. Issued shares
may include treasury shares. Share Capital,
either Ordinary Shares account or Preference
Shares account, is credited for the total par
value of fully collected subscriptions or in the
case of no-par value shares, for the total
consideration received in relation to the issue.
Share Capital is debited only when the issued
shares are retired, redeemed or canceled by the
corporation.
TERMS RELATED TO SHARE CAPITAL
• Subscribed share capital: It is the portion of the
authorized share capital that has been subscribed
but not yet fully paid. This shareholders’ equity
account is credited for the total par value of the
shares subscribed and debited for the total par
value of the fully collected subscriptions.
• Outstanding share capital: these are issued
shares, which are in the hands of the shareholders.
The number of outstanding shares will equal the
difference between the issued shares and the
treasury shares.
TERMS RELATED TO SHARE CAPITAL
• Treasury stock: these are issued shares
acquired by the corporation but not retired and
are therefore, awaiting to be reissued at a later
date.
ACCOUNTING FOR ISSUANCE OF SHARE CAPITAL
• When shares with par value are sold, the
proceeds should be credited to the share capital
account to the extent of the par value of the
shares, with any excess being reflected as share
premium.
• When shares without par value are sold, the
proceeds should be credited to the share capital
account. If the no-par stock has a stated value,
the excess proceeds over stated value may
alternatively be credited to share premium.
ACCOUNTING FOR ISSUANCE OF SHARE CAPITAL
• Section 61 of the Revised Corporation Code
prohibits the original issue of share capital (or
capital stock) for a consideration less than the
par or stated value (i.e. issued at a discount).
Section 64 provides for sanctions for issuing
watered stocks (shares issued less than par).
ACCOUNTING FOR ISSUANCE OF SHARE CAPITAL
ACCOUNTING FOR ISSUANCE OF SHARE CAPITAL

• Corporations set the par value of their ordinary

shares at nominal amounts such as P1 per share.
The par value is no indication of its 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 considerations as provided in Section
61 of the Revised Corporation Code:
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 corporation.
4. Previously incurred indebtedness by the
corporation.
• In issuing its share capital, a corporation may avail
of the services of an investment banker who is a
specialist in marketing shares to investors.
CONSIDERATIONS FOR ISSUANCE OF SHARES
• The investment banker may underwrite a
share issue which means that the banker agrees
to buy the shares of the corporation and sell
them to investors.
• The underwriter bears this risk in return for
gains from selling the shares at a price higher
than that paid to the corporation.
• An investment banker who is not willing to
underwrite may handle a share issue on a best
effort basis. The banker undertakes to sell as
many shares as possible at a set price but the
corporation bears the risk on unsold shares.
SHARES ISSUANCE FOR CASH
• Most share issues are for cash since the primary reason for issuing
shares is to raise capital for a corporation’s operating activities.
• With par value:
▫ Issuing share capital at par:
Ex.: Narsan Holdings is authorized to issue P1,000,000
ordinary shares divided into 10,000 shares, with a par value of
P100 per share. The diversified company issued on cash basis
2,000 shares at par. The issuance entry will be:
Cash 200,000
Ordinary Shares 200,000

The amount of P200,000 invested in the corporation is called

paid-in capital or contributed capital. The credit to Ordinary
Shares increases the share capital of the corporation.
SHARES ISSUANCE FOR CASH
▫ Issuing share capital above par:
Ex.: Suppose the 2,000 shares were sold at P150 per share, the
entry follows:
Cash 300,000
Ordinary Shares 200,000
Share Premium 100,000

This sale of shares increases the corporation’s contributed

capital by P300,000. When the shares with par value are sold,
the proceeds should be credited to the Ordinary Shares account
to the extent of the par value – in this case, P200,000; with any
excess to be reflected in the Share Premium account. The
excess of P100,000 is not a “gain”. The company can neither
earn a profit nor incur a loss when it issues shares to or
acquires shares from its shareholders.
SHARES ISSUANCE FOR CASH
• Without par value:
▫ Issuing no-par share capital:
Ex.: Morning Star Travel is a domestic corporation engaged in
the business of organizing tour packages for Asian and
European visitors to the Philippines. The company which is
located at J. Bocobo St., Manila, has two classes of shares –
preference shares and no-par ordinary shares. 5,000 ordinary
shares were issued for P85,000. The entry to record the issue of
these no-par shares will be:
Cash 85,000
Ordinary Shares 85,000
When shares without par value are sold, the proceeds should be
credited to the Ordinary Shares account. Accounting for
issuance of preference shares is basically the same as that of
ordinary shares. Section 6 of the Corporation Code prohibits
the issue of no-par value preference shares.
SHARES ISSUANCE FOR CASH
▫ Issuing no-par share capital with stated value:
Ex.: Suppose that Morning Star Travel’s no-par ordinary
shares have a stated value of P20. The company issued 5,000
shares at P25 per share. The entry will be:
Cash 125,000
Ordinary Shares 125,000
When shares without par value are sold, the proceeds should be
credited to the Ordinary Shares account. If the no-par stock has
a stated value, the excess proceeds over stated value – in this
case, P5 per share, may alternatively be credited to share
premium.
Cash 125,000
Ordinary Shares 100,000
Share Premium 25,000
SUBSCRIPTION OF SHARES
• The subscription contract is a legally binding contract which
provides for the number of shares subscribed, the subscription
price, the terms of payment and other conditions of the transaction.
• A subscriber becomes a shareholder upon subscription but the stock
certificates evidencing ownership over shares of stocks are not
issued until the full collection of the subscription.
Ex.: Warranty Auto Shop, Inc. is a quality car care center
located at St. Paul St., San Antonio Village, Makati City.
Assume that 5,000 shares of P10 par value ordinary shares of
the company were sold on subscription at P12 per share on
Sept. 1, 2016 to Ashley Langga. Subscription installments of
P24,000 and P36,000 will be due on Sept. 16 and 30,
respectively.
SUBSCRIPTION OF SHARES
The related entries are:
Sep. 1 Subscriptions Receivable 60,000
Subscribed Ordinary Shares 50,000
Share Premium 10,000
To record subscriptions above par.

Sep. 16 Cash 24,000

Subscriptions Receivable 24,000
To record initial installment.

Sep. 30 Cash 36,000

Subscriptions Receivable 36,000
To record final installment.

Subscribed Ordinary Shares 50,000

Ordinary Shares 50,000
To record issuance of stock certificates.
SUBSCRIPTION OF SHARES
• Subscriptions Receivable is a shareholders’ equity
account. It is presented in the statement of financial
position as a deduction from the related subscribed
ordinary shares; however, when it is collectible
within one year, this may be shown as a current
asset. It is debited for the total proceeds of the
subscriptions to the ordinary shares and credited
for the collections on the subscriptions.
• There are instances when a subscriber fails to settle
the subscriptions in full on the date specified in the
subscription contract or in the “call” made by the
board of directors. In such case, the subscribed
shares are declared delinquent shares.
SUBSCRIPTION OF SHARES
• The usual remedy is to dispose of these shares in
a public auction for the account of the
delinquent subscribers. These shares will be sold
to the person who is willing to pay the “offer
price” which includes the full amount of the
subscription balance plus accrued interest, cost
of advertisement and expenses of auction sale in
exchange for the smallest number of shares. This
person is referred to as the highest bidder.
SUBSCRIPTION OF SHARES
Ex.: Assuming the same facts from the previous slides except
that the subscriber failed to settle part of his subscriptions in the
amount of P48,000. After complying with the legal procedures
pertaining to delinquency sale, a public auction was held. The
offer price is P56,000 including P3,000 accrued interest and
P5,000 expenses of sale. Three bidders are willing to pay the
offer price, namely:
Lenore Loqueloque 4,300 shares
Luz Un 4,500 shares
Winnie Villanueva 4,700 shares

• Loqueloque is the highest bidder. The 5,000 shares are

deemed fully paid. Ashley Langga, the original subscriber,
gets 700 shares and Loqueloque received 4,300 shares.
SUBSCRIPTION OF SHARES
Subscriptions Receivable 60,000
Subscribed Ordinary Shares 50,000
Share Premium 10,000
To record subscriptions above par.

Cash 12,000
Subscriptions Receivable 12,000
To record partial initial installment.

Receivable from Highest Bidder 3,000

Interest Revenue 3,000
To record accrued interest on delinquent
shares.
SUBSCRIPTION OF SHARES
Receivable from Highest Bidder 5,000
Cash 5,000
To record auction expenses.

Cash 56,000
Receivable from Highest Bidder 8,000
Subscriptions Receivable 48,000
To record sale at public auction.

Subscribed Ordinary Shares 50,000

Ordinary Shares 50,000
To record issuance of stock certificates.
SUBSCRIPTION OF SHARES
• If there is no bidder, the corporation may bid for the
delinquent shares and the total amount due shall be credited
as paid in full in the books of the corporation. These shares
shall be considered as treasury shares.
• All the other entries will be the same except for the following:
Treasury Stock 56,000
Receivable from Highest Bidder 8,000
Subscriptions Receivable 48,000
To record purchase of own shares.
• A stockholder may be sued directly by creditors to the extent
of their unpaid subscriptions to the corporation (Keller vs.
COB Marketing, 141 SCRA 86).
2 METHODS OF ACCOUNTING FOR
SHARE CAPITAL
• There are two methods of accounting for share
capital authorization and issuance, namely:
1. Memorandum method – No entry is made to record
the authorized share capital. Only a memorandum is
made for the total authorized share capital. When
share capital is issued, it is credited to the share
capital account.
2. Journal entry method – The authorization to issue
share capital is recorded by debiting unissued share
capital and crediting authorized share capital. When
share capital is issued, it is credited to the unissued
share capital account.
2 METHODS OF ACCOUNTING FOR
SHARE CAPITAL
• Ex.: Lucky Draw Corporation was authorized to
issue P400,000 ordinary shares divided into
4,000 shares with a par value of P100 per share.
On Aug. 13, 2016, the company received
subscriptions for 1,000 shares at par from
various individuals. As at Sept. 20, 2016, 600 of
the subscribed shares have been fully paid and
the stock certificates issued correspondingly.
Next day, the company issued 400 shares at par
for cash. The entries are as follows:
2 METHODS OF ACCOUNTING FOR
SHARE CAPITAL
Journal Entry Method Memorandum Method
2 METHODS OF ACCOUNTING FOR
SHARE CAPITAL
Journal Entry Method Memorandum Method

• If a statement of financial position is prepared on Sept.

21, 2016, a portion of the shareholders’ equity section
will appear as follows:
2 METHODS OF ACCOUNTING FOR
SHARE CAPITAL
TREASURY STOCKS
• Shares of stock which have been issued and fully
paid for, but subsequently reacquired by the issuing
corporation either by purchase, redemption,
donation or through other lawful means.
• Such shares may again be disposed of for reasonable
price fixed by the board of directors.
• Section 40 of Revised Corporation Code provides
that a stock corporation has the power to purchase
its own shares for a legitimate purpose provided it
has unrestricted retained earnings.
TREASURY STOCKS

• Some of the reasons for the purchase of treasury

stock are as follows: (1) to support employee
stock compensation plans;(2) to improve the
stock market price by decreasing the supply of
shares; (3) to avoid takeover by an outside party.
TREASURY STOCKS
• Paragraph 33 of IAS No. 32, Financial Instruments:
Presentation, states that, if an entity reacquires its
own equity instruments, these instruments
(‘treasury shares’) shall be deducted from equity. No
gain or loss shall be recognized in profit or loss on
the purchase, sale, issue or cancellation of an
entity’s own equity instruments. Such treasury
shares may be reacquired and held by the entity or
by other members of the consolidated group.
Consideration paid or received shall be recognized
directly in equity.
TREASURY STOCKS
• There are two methods of accounting for
treasury stock transactions, namely: (1) par or
stated value method and (2) cost method.
• In the first method, treasury stock is debited for
an amount equal to the par or stated value of the
stock reacquired. The cost method is the
preferred method of accounting for treasury
stocks by the Accounting Standards Council as
stated in SFAS No. 18, par. 6.
TREASURY STOCKS
• Purchase of treasury stock:
▫ When the cost method is used, treasury stock is recorded at
cost regardless of whether the share is acquired below or
above par or stated value.
▫ The purchase of treasury shares does not decrease the
number of shares issued; only the outstanding shares
decrease. The effect of the purchase is to decrease both
total assets and total shareholders’ equity.
• Ex.: Plantation EcoResort is a world class destination in
Indang, Cavite. The operations have been successful. To
consolidate control over the enterprise and this avoid a
corporate takeover by outsiders, the board of directors
decided to minimize outstanding shares by purchasing
1,500 shares with a par value of P1,000 for P2,000.
TREASURY STOCKS
The entry will be:
Treasury Stock 3,000,000
Cash 3,000,000
To record acquisition of treasury shares.

• Reissuance of treasury stock:

▫ At cost: assume that the treasury shares are
subsequently reissued at cost.
Cash 3,000,000
Treasury Stock 3,000,000
To record reissue of treasury shares at
cost.
TREASURY STOCKS
▫ Above cost: assume that all treasury shares were reissued at P2,500 per share.

Cash 3,750,000
Treasury Stock 3,000,000
Share Premium – Treasury 750,000
To record reissue of treasury shares above cost.

Treasury stock is always debited for the cost of the shares purchased
or credited for the cost of the shares reissued. There is no reference to
par value.

▫ Below cost: assume that the 1,500 treasury shares were reissued at P1,500 per
share.
Cash 2,250,000
Retained Earnings 750,000
Treasury Stock 3,000,000
To record reissue of treasury shares below cost.
TREASURY STOCKS
• The excess of the cost over reissue price of P750,000 should be debited to
share premium-treasury to the extent of its balance. In the absence of any
balance in this account, the “loss” is debited to retained earnings.

Another illustration:
Ordinary share capital, 10,000 shares, P100 par 1,000,000
Share premium – original issuance 200,000
Share premium – treasury shares 20,000
Retained earnings 500,000
Treasury shares, 2,000 shares at cost 300,000

If subsequently, the treasury shares are reissued at P100 per share, the entry
is:
Cash (2,000 x 100) 200,000
Share Premium – TS 20,000
Retained earnings 80,000
Treasury shares 300,000
To record reissue of treasury shares below cost.
TREASURY STOCKS
• Retirement of treasury stock:
▫ The shares purchased may be subsequently retired. The
Ordinary Shares account is reduced by its par value. The
number of shares issued is reduced by the stock retired. The
treasury stock account is credited at cost.
▫ With gain on retirement: assume that Plantation
EcoResort purchased the treasury shares for P750 per
share. Observe that there is a “gain” on retirement if the
cost of treasury shares is less than par value.
Ordinary Shares 1,500,000
Share Premium 375,000
Treasury Stock 1,125,000
To record retirement of treasury shares.
TREASURY STOCKS
▫ With loss on retirement: assume that a total of
10,000 shares have been issued at P1,500 per
share prior to the purchase of treasury shares.
Plantation EcoResort purchased 1,500 treasury
shares for P2,000 per share; these were not
reissued and were ultimately retired.
Ordinary Shares 1,500,000
Share Premium 750,000
Retained Earnings 750,000
Treasury Stock 3,000,000
To record retirement of treasury shares.
TREASURY STOCKS
• The “loss” on retirement of P1,500,000 should
be debited to the following accounts in the order
given:
1. Share premium to the extent of the credit when
the share is issued;
2. Share premium from treasury stock transactions
of the same class of share;
3. Retained earnings
ILLUSTRATION. The accounts below appeared
in the trial balance of Jocelyn Cruz Events
Management Corporation as at December 31,
2016
Ordinary Shares, P150 par, 20,000 shares P2,700,000
authorized, 18,000 shares issued
Subscriptions Receivable 170,000
Subscribed Ordinary Shares 270,000
Retained Earnings 2,000,000
Share Premium 950,000
Treasury Stock, 1,000 shares, at cost 250,000
1. Authorized share capital: 20,000 shs. x P150 = P3,000,000
2. Unissued share capital: 2,000 shs. x P150 = P300,000
3. Issued share capital: 18,000 shs. X P150 = P2,700,000
4. Subscribed share capital: P270,000
5. Total Shareholder’s Equity
Ordinary shares P2,700,000
Share Premium 950,000
Subscribed Ordinary Shares P270,000
Less: Subscriptions Receivable 170,000 100,000
Retained Earnings 2,000,000
Total P5,750,000
Less: Treasury Stock 250,000
Total Shareholders’ Equity P5,500,000
6. Number of shares issued: 18,000 shares
7. Number of shares subscribed: P270,000/P150 = 1,800 shares
8. Number of treasury shares: 1,000 shares
9. Number of outstanding shares: 18,000 – 1,000 = 17,000 shares

SUMMARY OF THE EFFECTS ON ASSETS, LIABILITIES AND EQUITY

Transactions Assets Liabilities Equity

Issuance of Shares Increase No effect Increase
Purchase of Treasury Stock Decrease No effect Decrease
Reissuance of Treasury Stock Increase No effect Increase
DONATED CAPITAL
• Contributions, including shares of the corporation,
received from shareholders should be recorded at
the fair market value of the items received, with the
credit going to share premium. If significant, such
contributions may be designed as donated capital
(SFAS No. 18, par. 28).
• If the donation is in the form of shares of the
corporation, the account share premium or donated
capital is credited at the time the shares are
reissued.
DONATED CAPITAL
• Ex.1: Jocker’s Food Industries received a new service van from its
major shareholder as a gift. The donated asset has a cash price of
P350,000. The entry will be as follows:
Service Vehicle 350,000
Donated Capital 350,000
To record receipt of the donated service van.

• The donated asset increases the total assets and total shareholders’
equity by the fair market value of the assets received. Donated
capital is shown as part of share premium.

• Ex.2: Assume that the Jocker’s Food Industries received 500 of

P100 par value ordinary shares from its major shareholder as a gift.
The receipt of the donated share is recorded by means of a
memorandum entry as follows:
“Received 500 ordinary shares as donation.”
DONATED CAPITAL
• This transaction does not affect the assets, liabilities
or shareholders’ equity of the corporation. The
number of shares received as donation will reduce
the outstanding shares.
• These donated shares are essentially treasury stocks
which may reissued at any price. The sale of these
donated shares will increase assets and
shareholders’ equity. Assume that the 500 shares
were issued at P80 per share. The entry will be:
Cash 40,000
Donated Capital 40,000
To record sale of donated shares.
CONVERTIBLE PREFERENCE SHARES
• A convertible preference share is one which
gives the holder the right to exchange the
holdings for other securities of the issuing
corporation.
• When a corporation prospers and its ordinary
shares increases in value, convertible preference
shareholders can share in this success by
converting into the more valuable ordinary
shares.
ILLUSTRATION
Preference shares, P200 par value, 10,000 shares P2,000,000
Ordinary shares, P60 par value, 200,000 shares
authorized, P100,000 shares outstanding 6,000,000
Share Premium – Preference 400,000
Share Premium – Ordinary 2,000,000
Retained Earnings 4,000,000

If the preference shares are all converted into ordinary shares in a 1:3
ratio, the entries:
Preference shares 2,000,000
Share premium – Preference 400,000
Ordinary Shares (30,000 shs. x P60) 1,800,000
Share Premium – Ordinary 600,000
CONVERTIBLE PREFERENCE SHARES
• When convertibility is not provided in the articles of
incorporation, the preference shares cannot be
converted into ordinary shares (SEC opinion, Sec. 6,
par. 1, May 19, 1992).
• Even if provided in the articles of incorporation, the
conversion is not automatic as it would still require
an amendment to the articles of incorporation to
avoid watering of stocks (Sec. 64, RCCP) or issuance
of shares in excess of authorized share capital (SEC
Opinion, Sept. 3, 1990)
Thank you!