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ACCOUNTING FOR PARTNERSHIP –

Right of There is no right of There is right of succession. 
BASIC CONSIDERATIONS AND FORMATION
Succession succession. A corporation has the
Definition 
capacity of continued
 In a contract of partnership, two or more persons bind themselves to
existence regardless of the
contribute money, property or industry to a common fund with the
death, withdrawal,
intention of dividing the profits among themselves.  Two or more
insolvency or incapacity of
persons also form a partnership for the exercise of a profession. (Civil
its director or stockholders.
Code of the Philippines Article 1767)
Characteristics of a partnership
Term of Existence In a partnership, for The corporation shall have
 Mutual Contribution.  There cannot be a partnership without any period of time perpetual existence unless its
contribution of money, property or industry (i.e. work or services which stipulated by the articles of incorporation
may either be personal manual efforts or intellectual) to a common fund. partners. provides otherwise (RCCP,
 Division of Profits or losses.  The essence of partnership is that each Section 11).
partner must share in the profits or losses of the venture.
 Co-ownership of contributed assets.  All assets contributed into the
partnership are owned by the partnership by virtue of its separate and
distinct personality.  If one partner contributes an asset to the business, all
partners jointly own it in a special sense. Classification of Partnership
 Mutual agency.  Any partner can bind the other partners to a contract Object Liability Duration
if he is acting within his express or implied authority.
 Limited life.  A partnership has a limited life.  It may be dissolved by 1. Universal 4. General 6. Partnership
the admission, death, insolvency, incapacity, withdrawal of a partner or partnership of all 4. Limited with a fixed
expiration of term specified in the partnership agreement. present property term
 Unlimited liability.  All partners (except limited partners), including 2. Universal 6. Partnership
industrial partners are personally liable for all debts incurred by the partnership of at will
partnership.  If the partnership cannot settle its obligations, creditors’ profits
claims will be satisfied from the personal assets of the partners without 3. Particular
prejudice to the rights of the separate creditors of the partners. Partnership
 Income taxes.  Partnership, except general professional partnerships,
are subject to tax at the rate of 30% (per R.A. 9337) of taxable income. Purpose Legality of Existence
 Partners’ equity accounts.  Accounting for partnership are much like
accounting for sole proprietorships.  The difference lies in the number of 8. Commercial 10. De jure partnership
partners’ equity accounts.  Each partner has a capital account and a or Trading 10. De facto partnership 
withdrawal account that serves similar functions as the related accounts for Partnership 
sole proprietorships. 8. Professional
or Non-
Corporation trading
Partnership
 It 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 (Revised Corporation
Code of the Philippine (RCCP), Section 2). Kinds of partners
1. General partner – One who is liable to the extent of his separate
Advantages of partnership vs  sole proprietorship property after all assets of the partnership are exhausted.
1. Brings greater financial capability to the business. 2. Limited partner – One who is liable only to the extent of his capital
2. Combines special skills, expertise and experience of the partners. contribution.  He is not allowed to contribute industry or services only.
3. Offers relative freedom and flexibility of action in decision-making. 3. Capitalist partner – One who contributes money or property to the
Advantages of partnership vs  Corporation common funds of the partnership.
1. Easier and less expensive to organize. 3. Industrial partner – One who contributes his knowledge or personal
2. More personal and informal. services to the partnership.
Disadvantages of partnership vs  corporation 5. Managing partner – One whom the partners has appointed as manager
1. Easily dissolved and thus unstable compared to a corporation. of the partnership.
2. Mutual agency and unlimited liability may create personal obligations 5. Liquidating partner – One who is designated to wind up or settle the
to partners. affairs of the partnership after dissolution.
3. Less effective than a corporation in raising large amounts of capital. 7. Dormant partner – One who does not take active part in the business
of the partnership and is not known as a partner.
7. Silent partner – One who does not take active part in the business of
Distinguish Partnership to Corporation: the partnership though may be known as a partner.
9. Secret partner – One who takes active part in the business but is not
Partnership Corporation
known to be a partner by outside parties.
9. Nominal or partner by estoppel – One who is actually not a partner
Manner of Mere agreement of Created by operation of law but who represents himself as one.
Creation the partners

Number of Person Two or more Not exceeding 15. (One

persons  Person Corporation, RCCP  Articles of partnership
Sec 10) A partnership may be constituted orally or in writing.  In the latter case, partnership
agreements are embodied in the Articles of Partnership.
Commencement Commences from Commences from the Essential provisions may be contained in the agreement:
of Juridical the execution of issuance of certificate of 1. The partnership name, nature, purpose and location.
Personality articles of incorporation by the 2. The names, citizenship and residences of the partners.
partnership Securities and Exchange 3. The date of formation and the duration of the partnership.
Commission (SEC) 4.  The capital contribution of each partner, the procedure for valuing
noncash investments, treatment of excess contribution (as capital or as loan) and the
penalties for a partner’s failure to invest and maintain the agreed capital.
5. The rights and duties of each partners.
5. The accounting period to be adopted, the nature of accounting records,
financial statements and audits by independent public accountants.
Management Every partner is an Management is vested in the 7.  The method of sharing profit or loss, frequency of income
agent of the board of directors. measurement and distribution, including any provisions for the recognition of
partnership if the differences in contributions.
partners did not 8. The drawings or salaries to be allowed to partners.
appoint a managing 8. The provision for arbitration of disputes, dissolutions and liquidation.
partner.

 SEC registration
Extent of Each of the Stockholders are liable only
When the partnership capital is P3,000 or more, in money or property, the
Liability partners, except a to the extent of their
public instrument must be recorded with the Securities and Exchange Commission
limited partner, is interest or involvement in
(SEC)  Even if it is not registered, the partnership having a capital of P3,000 or
liable to the extent the corporation.
more is still valid and therefore has legal personality.
of his personal
The SEC shall not register any corporation organized for the practice of
assets.
public accountancy (The Philippine Accountancy Act 2004, Section 28)
The purpose of the registration is to set “a condition for the issuance of the
licenses to engage in business or trade.  In this way, the tax liabilities of big
partnership cannot be evaded, and the public also determine more accurately their
membership and capital before dealing with them.
Documents to be submitted:
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 Articles of partnership and afffected assets and liabilities.  The correction of a prior period error is
 Verification slip for the Business Name excluded from profit or loss for the period in which the error is discovered.
 Written undertaking to change business name, if required
 Tax Identification Number (TIN) of each partner and that of the Distribution of profits or losses based on partners’ agreement
partnership 1. Equally or in other agreed ratio.
 Registration data sheet for partnership duly accomplished in six (6) 2. Based on partners’ capital contributions:
copies a.  ratio of original capital contributions
Other documents that may be required: b. ratio of capital balances at the beginning of the year
1. Endorsement from other government agencies if the proposed c. ratio of capital balances at the end of the year
partnership will engage in an industry required by the government d. Ratio of average capital balances
2. For partnership with foreign partners, SEC Form F-105, bank 3. By allowing interest on partners’ capital and the balance in an agreed
certificate on the capital contribution of partners, proof of remittance of ratio.
contribution of foreign partners. 3. By allowing salaries to partners and the balance in an agreed ratio.
Pay the registration/filing and miscellaneous filing fee equivalent to 1/5 of 3. By allowing bonus to the managing partner based on profit and the
1% of the partnership capital but not less than P1,000 and legal research fee balance in an agreed ratio.
which is 1% of the filing fee. 3. By allowing salaries, interest on partners’ capital, bonus to managing
 Forward documents to the SEC Commissioner for signature. partner and the balance in an agreed ratio. 

Accounting for partnership DISSOLUTION –

CHANGES IN OWNERSHIP
 Owners’ Equity Accounts
 Loan Receivable From or Payable to Partners
Dissolution
Partnership formation
The dissolution of a partnership is the change in the relation of the
Valuation of Investment by Partners
partners caused by any partner ceasing to be associated in the carrying on as
 Partners may invest cash or non-cash assets in the partnership.   distinguished from the winding up of the business of the partnership. (Civil Code
When a partner invests non-cash assets, they are to be recorded at  values of the Philippines, Article 1828)
agreed upon by the partners.  In the absence of any agreement, the On dissolution, the partnership is not terminated, but continues until the
contribution will be recognized at their fair values at the date of transfer to winding up of the partnership affairs is completed (Article 1829).
the partnership. Winding up is the process of settling the business or business affairs after
 Fair market value of an asset is the estimated amount that a willing dissolution.  Termination is that point in time when all partnership affairs are
seller would receive from a financially capable buyer for the sale of the wound up or completed, and is the end of the partnership life. 
asset in a free market.  Per International Financial Reporting Standards One of the characteristics of a partnership is limited life.  Any change in the
(IFRS) No. 3, fair value is the price at which an asset or liability could membership of this form of business organization will result to dissolution. 
be exchanged in a current transaction between knowledgeable, Most changes in the ownership of a partnership are accomplished without
unrelated willing parties.  interruption of its normal operations.
A partnership is said to be liquidated when the business is terminated.  A
A partnership may be formed in any of the following ways: partnership may be dissolved without being terminated but liquidation is always
1. Individuals with no existing business form a partnership preceded by dissolution. 
2. Conversion of a sole proprietorship to a partnership When partnership dissolution occurs, a new accounting entity is formed.  The
a. A sole proprietor and an individual without an existing business form a old partnership should first adjust its books so that all accounts are properly
partnership. stated at the date of dissolution.
b. Two or more sole proprietors form a partnership This phrase, which literally signifies the choice of a person, is applied
3. Admission or retirement of a partner (to be discussed in dissolution of to show that partners have the right to select their co-partners; and that no set of
partnership) partners can take another person into the partnership without the consent of each of
3. Two or more partnerships form a partnership (to be discussed in the partners.
advanced accounting)  A new partner can only be admitted into a partnership with the consent of all the
continuing partners.
A new partner can only be admitted into a partnership with the consent of all
PARTNERSHIP OPERATIONS AND the continuing partners.  No one becomes a member of the partnership without the
FINANCIAL REPORTING consent of all the members.  This is because a partnership is based on mutual trust
and confidence of the partners.
Partners’ equity in assets contrasted with share in profits or losses A person admitted as a partner into an existing partnership is liable for
If “A is one-fourth partner,” does not always mean that  A, who has one- all the obligations of the partnership incurred before his admission as though he
fourth (1/4) equity in the net assets of the partnership, might have smaller or larger had been a partner when such obligations were incurred.  Such liability is limited
than 1/4 share in the partnership profits or losses.  Or A, who shares 1/4 of to his capital contribution, unless otherwise agreed.
partnership profits or losses, has more or less than one-fourth (1/4) equity in the net
assets of the partnership. Causes of dissolution
Keep in mind, regardless of the capital contribution of partners, they may 1.  Admission of a partner
agree on a specific profit or loss sharing. a. Purchase of an interest from one or more of the existing partners.
Rules for the distribution of profits or losses b.  Investment of assets in the partnership by the new partner.
Profits 2. Withdrawal or retirement of a partner
1. The profits will be divided according to partners’ agreement. a. by selling equity interest to one or more of the remaining partner
2. If there is no agreement, b. by selling equity interest to an outsider
a. As to capitalist partners, the profits shall be divided according to their c. by selling equity interest to the partnership
capital contributions (according to the ratio of original capital 3.  Death of a partner
investments or in its absence, the ratio of capital balances at the 4.  Incorporation of the partnership 
beginning of the year).
b. As to industrial partners (if any) such share as may be just and  Investment of assets in a partnership
equitable under circumstances, provided, that the industrial partner Definition of Terms
shall receive such share before the capitalist partners shall divide the Total contributed capital is the sum of the capital balances of the old partners and
profits. the actual investment of the new partner.
Losses Total agreed capital is the total capital of the partnership after considering the
1. The losses will be divided according to partners’ agreement. capital credits given to each of the partners.  Under the bonus method, total agreed
2. If there is no agreement as to distribution of losses, but there is an capital is equal to the total contributed capital though the capital credits to each
agreement to profits, the losses shall be distributed according to the partner may equal to, greater than or less than his capital contributions.
profit sharing ratio.
3. In the absence of any agreement, Definition of Terms
a. As to capitalist partners, the losses shall be divided according to their Bonus is the amount of capital or equity transferred by one partner to another
capital contributions (according to the ratio of original capital partner.
investment or in its absence, the ratio of capital balances at the
beginning of the year. Capital credit is the equity of a partner in the new partnership and is obtained by
b. As to purely industrial partners (if there’s any) shall not be liable for multiplying the total agreed capital by the applicable percentage interest of the
any losses. partner

Correction of prior period errors Bonus to old partners 

Per International Accounting Standards (IAS) No. 8, Accounting Policies, A partnership may be exceptionally attractive because of superior
Changes in Accounting Estimates and Errors, prior period errors are omissions earnings record such that the old partners may demand a premium from a new
from and other misstatements of the entity’s financial statements for one or more partner.  This premium increases the old partners’ capital interest.  This premium is
prior periods that are discovered in the current period.  Errors may occur as a result effected either by allocating a portion of the investment of the new partner to the
of mathematical mistakes, mistakes in applying accounting policies, old partners.  The capital accounts of the old partners are credited for the premium
misinterpretations of facts, fraud or oversights.  Examples include errors in the according to their “old” profit and loss ratio.
estimation of depreciation, errors in inventory valuation and omission of accruals of Bonus to new partner 
revenue and expenses. A new partner may be admitted into the partnership because of his vast
Material prior periods must be restated to report financial position and financial resources, extensive business network, distinctive reputation, unique
results of operations as they would have been presented had the error never taken management and/or technical skills.  The old partners may be willing to give a
place.  The amount of the correction of a prior period error that relates to prior premium for all these exceptional qualifications by allowing a capital credit greater
periods should be reported by adjusting the opening balances of partners’ equity than the prospective partner’s investment just to ensure his association with the
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partnership.  This premium will be treated as a bonus from the equities of the old law that directly creates the corporation or by means of a general corporation law
partners and credited to the new partner. (i.e., The New Corporation Code of the Philippines).
Death of a Partner 3. It enjoys the right of succession. A corporation has the capacity of continued
The death of a partner dissolves a partnership.  When the death of a existence. The death, withdrawal, insolvency or incapacity of the individual
partner does not result to liquidation, the accounting procedures to be followed shareholders or members will not dissolve the corporation. The transfer of
are similar to those discussed in the withdrawal of a partner.  The deceased ownership of shares of stock does not dissolve the corporation.
partner may be considered to have retired from the partnership and his heirs or 4. It has the powers, attributes and properties expressly authorized by law or
estate can expect to receive the amount of his interest from the business.  If incident to its existence.
payment to the estate of the deceased cannot be made immediately, the balance in
the capital account of the deceased partner should be transferred to a liability Advantages of a corporation
account, payable to the estate.  1. The corporation has the legal capacity to act as a legal entity.
2. Shareholders have limited liability.
LIQUIDATION  3. It has continuity of existence.
LIQUIDATION 4. Shares of stock can be transferred without the consent of the other shareholders.
The liquidation of a partnership is the winding up of its business 5. Its management is centralized in the board of directors.
activities characterized by sale of all non-cash assets, settlement of all liabilities 6. Shareholders are not general agents of the business.
and distribution of the remaining cash to the partners.  The conversion of non- 7. Greater ability to acquire funds.
cash assets into cash is referred to as realization.  This may either result to a gain
or loss on realization and shall be divided in the profit or loss ratio of the partners.  Disadvantages of a corporation
In some cases, a substantial loss on realization may yield for a partner a capital 1. A corporation is relatively complicated in formation and management.
deficiency, which is the excess of a partner’s share in losses over the partner’s 2. There is a greater degree of government control and supervision.
capital balance.  This deficiency will certainly affect the partner’s interest – the 3. It requires a relatively high cost of formation and operation.
sum of his capital and loan accounts – in the partnership.  4. It is subject to heavier taxation than other forms of business organizations.
5. Minority shareholders are subservient to the wishes of the majority.
Dissolution 6. In large corporations, management and control have been separated from
The dissolution of a partnership is the change in the relation of the ownership.
partners caused by any partner ceasing to be associated in the carrying on as 7. Transferability of shares permits the uniting of incompatible and conflicting
distinguished from the winding up of the business of the partnership. (Civil Code elements in one venture.
of the Philippines, Article 1828)
On dissolution, the partnership is not terminated, but continues until Classes of corporations
the winding up of the partnership affairs is completed (Article 1829). 1. Stock corporation. Corporations which have share capital divided into shares
Winding up is the process of settling the business or business affairs after and are authorized to distribute to the holders of such shares dividends or
dissolution.  Termination is that point in time when all partnership affairs are allotments of the surplus profits on the basis of the shares held.
wound up or completed, and is the end of the partnership life.  2. Non-Stock corporation. A non-stock corporation is one where no part of its
Most changes in the ownership of a partnership are accomplished income is distributable as dividends to its members, trustees or officers. Any profit
without interruption of its normal operations. that a non-stock corporation may obtain as an incident to its operation shall,
A partnership is said to be liquidated when the business is terminated.  A whenever necessary or proper, be used for the furtherance of the purpose or
partnership may be dissolved without being terminated but liquidation is always purposes for which the corporation was organized.
preceded by dissolution. 
Other classifications of corporations
Rules in settling accounts after dissolution 1. According to number of persons:
The following rules are subject to revisions by the agreement of the partners, either A. Corporation aggregate. A corporation consisting of more than one corporator.
in their original partnership agreement  (Article of Partnership) or in a dissolution B. Corporation sole or a special form of corporation usually associated with
agreement (Civil Code of the Philippines Article 1839). clergy. It is a corporation which consists of only one member or corporator and has
successors such as a bishop.
Assets of the Partnership consist of the following: 2. According to nationality:
1.  partnership property A. Domestic Corporation: A corporation organized under Philippine laws.
2.  additional contributions of the (general) partners needed for the payment B. Foreign Corporation: A corporation organized under foreign laws.
of all liabilities consistent with the discussion below. 3. According to whether for public or private purposes:
A. Public Corporation: A corporation formed or organized for the government of
Order of Preference a portion of the state. (e.g. provinces, cities, municipalities and barangays).
The assets of a general partnership shall be applied in the following order: B. Private Corporation: A corporation created for private aim, benefit or purpose.
1. First, those owing to outside creditors. 4. According to whether for charitable purpose or not:
2. Second, those owing to inside creditors in the form of loans or A. Ecclesiastical Corporation: Those organized for religious purposes.
advances for business expenses by the partners. B. Eleemosynary Corporation: Those established for public charity.
3. Third, those owing to partners with respect to their capital C. Civil Corporation: Those established for business or profit.
contributions. 5. According to their legal right to corporate existence:
4. Lastly, those owing to the partners with respect to their share of the A. De jure Corporation: A corporation existing in fact and in law. It is organized
profits.  in strict conformity with the law.
The second preference above gives the partner with the loan account the B. De Facto Corporation: A corporation existing in fact but not in law.
option to exercise his right to offset.  This privilege is the legal right of a partner to 6. According to degree of public participation with regard to share ownership:
apply part or all of his loan account balance against his capital deficiency resulting A. Close corporation. A corporation whose share ownership is limited to selected
from losses in the realization of the partnership assets. person or members of a family not exceeding 20 persons.
B. Open corporation. A corporation where the shares is available for
Methods of partnership liquidation subscription or purchase by any person.
1. Lump-sum method C. Publicly-held corporation. A corporation with a class of equity securities
Under this method,  listed on an exchange or with assets in excess of P50,000,000 and having 200 or
a. all non-cash assets are realized and  more holders, at least 200 of which are holding at least 100 shares of a class of its
b. the related gains or losses distributed and  equity securities.
c. all liabilities are paid before  7. According to their relation to another corporation:
d. a single final cash distribution is made to the partners. A. Parent or holding corporation. A corporation that is related to another
e. This process persists until all the non-cash assets are sold.  corporation that is has the power to either directly or indirectly elect majority of the
f. directors of a subsidiary corporation.
2. Installment method B. Subsidiary corporation. A corporation controlled by another corporation
Under this method,  known as a parent corporation.
a. realization of non-cash assets is accomplished over an extended period
of time.   Components of a corporation
b. When cash is available, creditors may be partially or fully paid.   Corporators are those who compose a corporation, whether as stockholder or
c. Any excess may be distributed to the partners in accordance with a shareholder in a stock corporation or as member in a non-stock corporation.
program of safe payments or a cash priority program. Incorporators are those stockholders or members mentioned in the Articles of
Incorporation (AOI) as originally forming and composing the corporation and who
ACCOUNTING FOR CORPORATION – are signatories o said articles of incorporation (Sec 5)
BASIC CONSIDERATIONS Shareholders or stockholders are corporators in a stock corporation (Sec. 5).
Shareholders may be natural or juridical persons.
Definition Members are corporators of a non-stock corporation (Sec. 5).
R.A. 11232 Revised Corporation Code of the Philippines (RCCP) signed on Subscribers are persons who have agreed to take and pay for original, unissued
February 20, 2019 and became effective on February 23, 2019. shares of a corporation formed or to be formed. Note: All incorporators are
A corporation is an artificial being created by operation of law, having the right of subscribers but a subscriber need not be an incorporator.
succession and the powers, attributes and properties expressly authorized by law or Promoter is a person who, acting alone or with others, takes initiative in founding
incident to its existence. (RCCP, Section 2) and organizing the corporation and receives consideration therefor.
Underwriters are usually investment bankers who have:
Attributes of a corporation agreed, alone or with others, to buy at stated terms an entire or a substantial
1. A corporation is an artificial being with a personality separate and apart from part of an issue of securities; or
its individual shareholders or members. guaranteed the sale of an issue by agreement to buy from the issuing
2. It is created by operations of law. It cannot come into existence by mere corporation any unsold portion at a stated price; or
agreement of the parties as in the case of business partnerships. Corporations agreed to use his best efforts to market at or part of an issue; or
require special authority or grant from the State, either by a special incorporation offered for sale he has purchased from a controlling stockholder.
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Independent auditor is a person who, apart from shareholdings and fees received  The time and manner of calling and conducting regular or special
from the corporation, is independent of management and free from any business or meetings and mode of notifying the shareholders or members
other relationship which could, or could reasonably be perceived to, materially thereof;
interfere with the exercise of independent judgment in carrying out the  The required quorum in meetings of shareholders or members
responsibilities as a director (Sec 22). and the manner of voting therein;
The board of some corporations vested with public interest shall have independent  The mode by which a stockholder, member, director or trustee
directors constituting at least 20% of such board. may attend meetings and cast their votes;
Corporations covered by Sec 17.2 of RA 8799, “The Securities Regulation Code”,  The form for proxies of shareholders and members and manner of
namely those whose securities are registered with SEC, corporations listed with an voting them;
exchange or with assets of at least P50 M and having 200 or more holders of shares,  The directors’ or trustees’ qualifications, duties and
with at least 100 shares of a class of its equity shares. responsibilities, the guidelines for setting the compensation of
Banks and quasi-banks, non-stock savings and loan associations (NSSLAs), directors or trustees and officers, and the maximum number of
pawnshops, corporations engaged in money service business, pre-need, trust and other board representations that an independent director or trustee
insurance corporations, and other financial intermediaries; and may have which shall, in no case, be more than the number
Other corporations engaged in business vested with public interest similar to the prescribed by the SEC.
above, as may be determined by he Commission, after taking into account relevant  The time for holding the annual election of directors or trustees
factors which are germane to the objective and purpose of requiring the election of and the mode or manner of giving notice thereof;
an independent director, such as the extent of minority ownership type of financial
 The manner of election or appointment and the term of office of
products or securities issued or offered to investors, public interest involved in the
all officers other than directors or trustees;
nature of business operations and other analogous factors.
 The penalties for violation of the by-laws;
9. Additional General Powers per RCCP. Every corporation incorporated under
the RCCP is expressly given the power to enter into a partnership, joint venture, or  In the case of stock corporations, the manner of issuing stock
any commercial agreement with natural or juridical persons (Note: under BP68, certificates;
only to enter into merger or consolidation with other corporations). Also, domestic  Such other matters as may be necessary for the proper or
corporations are allowed to give donations in aid of any political party or convenient transactions of the corporate affairs for the promotion
candidates or for purposes of partisan political activity (Sec 35). These were not of good governance and anti-graft and corruption measures;
allowed in the (old) Corporation Code.  An arbitration agreement may be provided in the by-laws
pursuant to Sec 131.
Classes of shares in general Registration, incorporation and commencement of corporate existence
Par value shares – One in which a specific amount in the articles of incorporation Under Section 18, a person or group of persons desiring to incorporate shall submit
and appearing on the certificate of stock. The par value is the minimum issue price the intended corporate name to the SEC for verification. If the Commission finds
of the shares. that the name is distinguishable from a name already reserved or registered for the
No-par value shares – One without any value appearing on the face of the use of another corporation, not protected by law and not contrary to law, rules and
certificate of stock. A no-par value share may have a stated value which only be regulations, the name shall be reserved in favor of the incorporators. The
fixed in the articles of incorporation or by the board of directors or the incorporators shall then submit their articles of incorporation and by-laws to the
shareholders. Thus, issue price may vary from time to time as it is usually fixed Commission.
based on the book value of the corporation’s shares. If the Commission finds that the submitted documents and information are fully
The minimum stated value of a no-par value is five pesos (P5.00) per share. In compliant with the RCCP and other relevant laws, rules and regulations, SEC shall
addition, shares issued without par value are deemed fully paid. issue the Certificate of Incorporation. The private corporation commences its
 Voting shares – Those issued with the right to vote. corporate existence and juridical personality from the date the SEC issues the
 Non-voting shares – Those issued without the right to vote. certificate of incorporation under its official seal.
 Ordinary Shares – Those shares entitle the holder to an equal pro-rata
Non-use of corporate charter and continuous inoperation
division of profits without any preference.
Section 21 states that if a corporation does not formally organize and commence its
 Preference Shares – These shares entitle the holder to certain advantages or
business within five (5) years(Note: two (2) years in the Corporation Code) from
benefits over the holders of ordinary shares.
date of its incorporation, its certificate of incorporation shall be deemed revoked as
 Founders’ shares may be given certain rights and privileges not enjoyed by of the day following the end of the five-year period.
owners of other stocks (Sec 7) However, if a corporation has commenced its business but subsequently becomes
 Redeemable shares may be issued by the corporation when expressly inoperative for a period of at least five (5) consecutive years, the SEC may, after
provided in AOI. They are shares which may be purchased by the the notice and hearing, place the corporation under delinquent status.
corporation from the holders of such shares upon expiration of a fixed period, A delinquent corporation shall have a period of two (2) years to resume operations
regardless of the existence of unrestricted retained earnings in the books of and comply with all requirements that the SEC prescribe. Upon compliance by the
the corporation, and upon such other terms and conditions stated in the AOI corporation, the SEC shall issue an order lifting the delinquent status. Failure to
and the certificate of stock representing the shares (Sec 8). comply with the requirements and resume operation within the period given by the
 Treasury shares. A stock that has been issued by the corporation as fully SEC shall cause the revocation of the corporation’s certificate of incorporation.
paid and later reacquired but not retired. The SEC may also place the corporation under delinquent status in case of failure
 Promotion shares. Those issued to promoters as compensation in promoting to submit the reportorial requirements three (3) times consecutively or
the incorporation of a corporation or for services rendered in launching or intermittently within a period of five (5) years (Sec 177).
promoting the welfare of the corporation.
 Convertible shares. A stock which is convertible or changeable from one No minimum capital stock
class to another class. Stock corporation shall not be required to have a minimum capital stock, except as
otherwise provided by special laws (Sec 12). The minimum paid-in capital of at
Articles of incorporation least P5,000 under Sec 13 of (old) Corporation Code of the Philippines was deleted.
1. The name of the corporation; There is also no minimum subscribed capital and no minimum paid-in capital
2. The specific purpose or purposes for which the corporation is formed; requirement. The requirements under Sec 13 of the Corporation Code of the
3. The principal place of business which must be within the Philippines; Philippines, which states, “at the time of incorporation, at least 25% of the
4. The term of existence if the corporation did not elect perpetual existence; authorized capital stock as stated in AOI must be subscribed and at least 25%
5. The names, nationalities and residences of the incorporators; of the total subscriptions must be paid upon subscription” have been deleted in
6. The number of directors or trustees, which shall not be more than fifteen(15); the RCCP.
7. The names, nationalities and residences of the persons who shall act as directors Note that the 25% subscribed and 25% paid-up rule is still applicable when
or trustees until the first regular directors or trustees are elected and qualified. the corporation increases its capital stock (Sec 37).
If it be a stock corporation:
a. Amount of authorized share capital in pesos, Basic corporate organizational structure
b. Number of shares into which it is divided, Shareholders elect the Board of Directors elect the Officers hire Employees
c. In case the shares are par value shares: Sec 24 states that the president of a corporation must be a director of the
 the par value of each share, corporation, but he cannot act as president and secretary or as president and
 names, nationalities and residences of the original shareholders, treasurer at the same time. The president is the only officer required by law to be a
 The amount subscribed and paid by each subscriber on his subscription. director.
In case of no-par value, the article need only state such fact, and the number of  The corporate secretary must be resident and a citizen of the
shares into which share capital is divided. Philippines. He need not be a director unless required by the corporate
If it be non-stock corporation, the amount of its capital, the names, nationalities and by-laws. It is generally the duty of the secretary to make and keep its
residences of the contributors and the amount contributed. records and to make proper entries of the votes, resolutions and
Such other matters consistent with law and which the incorporators may deem proceedings of the shareholders and directors in the management of the
necessary and convenient. corporation.
An arbitration agreement may be provided in the article of incorporation pursuant  The corporate treasurer is the proper officer entrusted with the
to Sec 181 of RCCP. authority to receive and keep the money of the corporation and to
disburse them as may be authorized. The treasurer may or may not be a
By-laws director but is required per Sec 24 of the RCCP to be resident of the
These are the rules of action adopted by the corporation for its internal government Philippines.
and for the government of its officers, shareholders or members. The by-laws shall There is no prohibition in the law against a shareholder being a director or officer
be adopted within one (1) month from the issuance of the certificate of of two or more corporations. The (Old) Corporation Code does not prohibit a
incorporation by the SEC. Failure to file a code of by-laws shall render the corporate officer from accepting the same position in another corporation organized
corporation liable for the revocation of its registration. for the same purpose. However, such situation may be prohibited by special
A private corporation may provide in its by-laws for: law, the article of incorporation or the corporate by-laws.
 The time, place and manner of calling and conducting regular or
special meetings of the directors or trustees; Rights of a shareholder
 5

 Right to be issued certificate of stock or other evidence of share ownership stockholder within five (5) days from such occurrence and stating in such notice the
and to transfer such shares. names, residence addresses and contact details of all known legal heirs.”
 Right to vote via remote communication or in absentia at shareholders’ The single stockholder shall designate a nominee and an alternate nominee who
meetings (Sec 57) shall, in the event of the single stockholder’s death or incapacity, take the place of
 Right to elect and remove directors. the single stockholder as director and shall manage the corporation’s affairs. The
 Right to adopt, amend or repeal the by-laws. AOI shall state the names, residence addresses and contact details of the nominee
 Right to purchase a portion of any new shares issued to maintain the same and alternate nominee, as well as the extent and limitations of their authority in
percentage of stock ownership. The right is known as pre-emptive right. managing the affairs of the OPC. The written consent of the nominee and alternate
However, the right is not absolute and may be denied. nominee shall be attached to the application for incorporation. Such consent may
 Right to receive dividends when declared. be withdrawn in writing any time before the death or incapacity of the single
stockholder (Sec 124). The single stockholder may, at any time, change its
 Right to inspect corporate books and records and to receive financial reports
nominee and alternate nominee by submitting to the SEC the names of the new
of the corporation’s operations.
nominees and their corresponding written consent. For this purpose, the AOU need
 Right to participate in the distribution of corporate assets upon dissolution.
not be amended (Sec 126).
A OPC shall maintain a minutes book which shall contain all actions, decisions,
Corporate books and records
and resolutions taken by the OPC (Sec 127).. Records in Lieu of Meetings – When
 Minutes book. It contains the minutes of the meetings of the directors and action is needed on any matter, it shall be sufficient to prepare a written resolution,
shareholders. signed and dated by the single stockholder, and recorded in the minutes book of the
 Stock and transfer book. It is a record of the names of shareholders, OPC. The date of recording in the minutes book shall be deemed to be the date of
installments paid and unpaid by shareholders and dates of payment, any the meeting for all purposes under the RCCP (Sec 128).
transfer of stock and dates thereof, by whom and to whom made. Comparison of the article of incorporation
 Books of accounts. These represents the record of all business transactions. per RCCP and Corporation code
The books of accounts normally include the journals and the ledger. RCCP Corporation Code
 Subscription book. It is a book of printed blank subscriptions. RA 11232 Signed by Pres. BP 68 Signed by Pres.
 Shareholders’ ledger. It is a ledger which details the number of shares Rodrigo R. Duterte Ferdinand E. Marcos
issued to each shareholders.
Name If the corporation is an OPC, OPC is not allowed.
 Subscribers’ ledger. It is a subsidiary ledger for the subscription receivable
the letters ”OPC” is required in
account; it reports the individual subscriptions of the subscribers.
the corporate name.
 Stock certificate book. It is a book of printed blank certificate of stock.
Who can be an Any natural person, Only natural person
Sec 73 RCCP record keeping incorporator partnership, corporation or
 The AOI and by-laws of the corporation and all their amendments. association
 The current ownership structure and voting rights of the corporation, Number of One incorporator is enough At least five (5)
including lists of stockholders or members, group structures, intra-group incorporators incorporators but not
relations, ownership data, and beneficial ownership. more than fifteen (15)
 The names and addresses of the members of the board of directors, or trustees Residence of No residency requirement for A majority of the
and the executive officers. incorporators incorporators incorporators must be
 A record of all business transactions. residence of the
 A record of the resolutions of the board of directors or trustees and of the Philippines
stockholders or members. Term Shall have perpetual term by Not exceeding fifty
 Copies of the latest reportorial requirements submitted to the Commission default unless the AOI provides (50) years
(SEC); and otherwise.
 The minutes of all meetings of stockholders or members, and of the board of
Number of No minimum number of Minimum number of
directors or trustees.
directors directors/trustees except for directors is five (5).
educational corporations and
Sec 74 RCCP
religious societies.
A corporation shall furnish a stockholder or member, within ten (10) days from
receipt of their written request, it most recent financial statements, in the form and Residence of No residency requirement for A majority of the
substance of the financial reporting required by SEC. At the regular meeting of directors directors directors must be
stockholders or members, the board of directors or trustees shall present to such Philippine residents.
stockholders or members a financial report of the operations of the corporation for Amount of No minimum capital stock At least 25% of the
the preceding year, which shall include financial statements, duly signed and subscribed and requirement unless required by authorized capital
certified in accordance with the RCCP, and the rules the SEC may prescribe. paid-in capital special law. There is also no stock must be
However, if the total assets or total liabilities of the corporation is less than minimum subscribed capital subscribed and at least
P700,000, or such other amount as may be determined appropriate by the and no minimum paid-in 25% of the subscribed
Department of Finance, the financial statements may be certified under oath by the capital. capital must be paid-
treasurer and the president. up.
Statement of Subscribed and paid-in capital In two (2) separate
One person corporation (OPC) under RCCP subscribed and th th th)
OPC is a corporation with a single stockholder, who may be a natural person, trust paid-in capital are in the 8 clause of AOI clauses (8 and 9
or an estate (Sec 116). One person may incorporate two or more OPCs. (RCCP, Sec 14) of the AOI (Sec 15,
The following are not qualified to form OPC: Corporation Code)
 Banks and quasi-banks, pre-need, trust, insurance, public and publicly- Treasurer’s A separate treasurer’s affidavit A separate treasurer’s
listed companies and non-chartered government-owned and –controlled Affidavit is no longer required but the affidavit is required.
corporations. certificate of the treasurer is
 A natural person who is licensed to exercise a profession, except as th
part of the AOI (9 clause).
otherwise provided under special laws (Sec 116)
Undertaking to No longer required to submit a There is a separate
The OPC has a personality separate and distinct from the single stockholder. The
change name separate undertaking, see the undertaking to change
sole shareholder’s liability is limited to his investment. He has the burden of
th the corporate name to
affirmatively showing that the corporation was adequately financed. Where the 10 Clause of AOI. be signed by directors.
single stockholder cannot prove that the property of the OPC is independent of the
Signatories The incorporators and the Only incorporators
stockholder’s personal property, the stockholder shall be jointly and separately
treasurer sign the AOI. sign the AOI.
liable for the debts and other liabilities of the OPC. The principle of piercing the
corporate veil applies with equal force to OPC as with other corporations (Sec 130).
An OPC shall not be required to have a minimum authorized capital stock except as
otherwise provided by special law (Sec 117). If the corporation is an OPC, the Accounting for corporation – Share capital
letters “OPC” is included, either below or at the end of the corporate name (Sec
120). Shareholders’ equity
The OPC is not required to submit and file corporate by-law (Sec 119). But, the Is the owners’ equity of a corporation’s statement of financial position. The major
OPC is required to file the AOI in accordance with Sec 14. It shall likewise components are:
substantially contain the following: a. Share capital
If the single stockholder is a trust, an estate, the name, nationality and b. Retained Earnings
residence of the trustee, administrator executor, guardian, conservator,
custodian, or other person exercising fiduciary duties together with the proof Share capital
of such authority to act on behalf of the trust or estate; and It is the shares to be subscribed and paid in or secured to be paid in by the
Name, nationality, residence of the nominee and alternate nominee, and the shareholders, either in money, property or services, at the time of organization of
extent, coverage and limitation of the authority (Sec 118). the corporation or afterwards, and upon which it is to conduct its operations. The
The single stockholder shall be the sole director and president of the OPC (Sec share is further divided into:
121). Within fifteen (15) days from the issuance of the certificate of incorporation, a. Legal capital
the OPC shall appoint a treasurer, corporate secretary, and other officers as it may b. Share Premium
deem necessary, and notify the SEC thereof within five (5) days from appointment.
The single stockholder may not be appointed as the corporate secretary. The single Legal capital
stockholder may be the treasurer. The single stockholder who is likewise the self-  Capital contributed by shareholders comes from the sale of shares of stock.
appointed treasurer of the corporation, shall give a two-year term bond to the SEC The shares of stock issued are generally referred to as share capital. Legal
in such a sum as may be required (Sec 122). capital is that portion of the contributed capital or the minimum amount of
The single stockholder cannot be a corporate secretary in view of its special paid-in capital, which must remain in the corporation for the protection of
functions under Section 123 (c), “notify the SEC of the death of the single corporate creditors.
 6

 In case of par value shares, the legal capital is the aggregate par value of all Issuing Share Capital with stated value:
issued and subscribed shares. Cash xxx
 In case of no-par shares, legal capital is the total contributed received by the Ordinary Shares (at stated value) xxx
organization for the issuance of its shares to the shareholders including the Share Premium xxx
excess of issue price over the stated value.
 Previously known as Additional Paid-in Capital (APIC). It is the portion of Subscription of shares
the paid-in capital representing amounts paid by shareholders in excess of There are times when a corporation sells its shares directly to investors on a
par. It includes share options outstanding and may also result from subscription basis. The subscription contract is a legally binding contract which
transactions involving treasury stocks, retirement of shares, donated provides for the number of shares subscribed, the subscription price, the terms of
capital, share dividends and any other “gain’ on the corporation’s own payment and other conditions of the transactions. A subscriber becomes a
stock transactions. shareholder upon subscription but the stock certificates ownership over shares of
stocks are not issued until the full collection of the subscription.
Retained earnings Accounting for Subscription of shares
(or accumulated profits or losses) is the amount of capital accumulated and Subscription Receivable
retained through profitable operations of the business. The Philippine Accounting Subscribed Ordinary Shares
Standards (PAS) has adopted the terminology used in the International Accounting Share Premium
Standards (IAS). To record subscriptions above par.
Cash
Two basic types of shares Subscription Receivable
Share capital is divided into transferable shares of stock. A share of stock To record initial installment.
represents the interest or right of a shareholder in a corporation and is evidenced by Cash
a certificate of stock. Subscription Receivable
1. Ordinary Shares – This share represents the basic ownership class of To record final installment.
the corporations. Subscribed Ordinary Share
2. Preference Shares – This share gives the owners certain advantages Ordinary Share
over ordinary shareholders. The special benefits relate either to the To record issuance of stock certificates.
receipt of dividends when declared before the ordinary shareholders  Subscription Receivable is a shareholders’ equity account. It is presented
(preference as to dividends) or to priority claims on assets in the event in the statement of financial position as a deduction from the related
of corporate liquidation (preferred as to assets). 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
Terms related to share capital proceeds of the subscription to the ordinary shares and credited for the
 Authorized share capital. The number of authorized share indicates the collections on the subscriptions.
maximum number of shares the corporation can issue as specified in the
article of incorporation. This maximum number of shares when multiplied by Accounting for delinquent shares
the par value of the share will yield the authorized share capital. Note that There are instances when a subscriber fails to settle the subscriptions in full on the
any increase or decrease in the authorized share capital requires approval of date specified in the subscription contract or in the “call” made by the board of
the SEC and formal amendment to the articles of incorporation. directors. In such case, the subscribed shares are declared delinquent shares. The
 Issued Share Capital. These are shares which have been sold and paid for in usual remedy is to dispose of these shares in a public auction for the amount of the
full. Issued shares may include treasury shares. Share capital, either delinquent subscriber. These shares will be sold to the person who is willing to pay
Ordinary Share account or Preference Share account, is credited for the total the “offer price” which includes the full amount of the subscription balance plus
par value of fully collected subscriptions or in the case of no-par value shares, accrued interest, cost of advertisement and expenses of auction sale in exchange for
for the total consideration received in relation to the issue. Share Capital is the smallest number of shares. The person is referred to as the highest bidder.
debited when the issued shares are retired, redeemed or canceled by the Subscription Receivable
corporation. Subscribed Ordinary Shares
 Subscribed Share Capital. It is the portion of the authorized share capital Share Premium
that has been subscribed but not yet fully paid. The shareholders’ equity To record subscriptions above par.
account is credited for the total par value of the shares subscribed and debited Cash
for the total par value of the fully collected subscriptions. Subscription Receivable
 Outstanding Share Capital. These are issued shares, which are in the hands To record partial initial installment.
of the shareholders. The number of outstanding shares will equal the Receivable from Highest Bidder
difference between the issued shares and the treasury shares. Interest Revenues
 Treasury Stock. These are issued shares acquired by the corporation but not To record accrued interest on delinquent shares.
retired and are therefore, awaiting to the reissued at a later date. Receivable from Highest Bidder
Cash
Accounting for issuance of share capital To record auction expenses.
When shares with par value are sold: Cash
Cash (or any asset received) Receivable from Highest Bidder
Share Capital (at par value of the shares) Subscription Receivable
Share Premium (excess over par value) To record sale at public auction.
When shares with no-par value are sold: Subscribed Ordinary Shares
Cash (or any asset received) Ordinary Shares
Share Capital (full consideration received) To record issuance of stock certificate.
When no-par value shares has stated value are sold: If there are no bidders, the corporation may bid for the delinquent shares and the
Cash (or any asset received) total amount due shall be credited as paid in full in the books of the corporation.
Share Capital (at stated value of the shares) Treasury Stock
Share Premium (excess over stated value) Receivable from Highest Bidder
Subscription Receivable
Section 64 RCCP prohibits the original issue of share capital (or capital stock) To record purchase of own shares.
for a consideration less than the par or stated value (i.e. issued at a discount).
Corporations set the par value of their ordinary shares at nominal amounts such as Measurement of share-based payments
P1 per share. The par value is no indication of its market value; it merely indicates International Financial Reporting Standards (IFRS) No. 2, Share-Based Payments,
the amount per share to be entered in the share capital account. Equity-Settled Based Payment Transactions, paragraphs 10 to 15, provides the
following:
Considerations for issuance of shares a. Share-based payments to non-employees are measured at fair value
1. Actual cash paid to the corporation. of the goods or services received. If the fair value of the goods or
2. Tangible and intangible properties actually received by the corporation. services received cannot be reliably determined, then the fair value of
3. Labor already performed for or services actually rendered to the the equity instruments is used. The measurement date is the date the
corporation. entity obtains the goods or the counterparty renders services.
4. Previously incurred indebtedness by the corporation. b. Share-based payments to employees including share options, the
5. Amounts transferred from unrestricted retained earnings to stated transaction should be measured at fair value of the equity
capital. instruments granted because the fair value of the services provided by
6. Outstanding shares exchanged for stocks in the event of reclassification the employees generally is not reliably measurable. The fair value of
or conversion. the share options must be determined at the date the options are
7. Shares of stock in another corporation; and/or granted.
8. Other generally accepted form of consideration (Sec 61, RCCP) The term “fair values” is the amount for which an asset can be exchanged, a
liability settled, or an equity instrument granted could be exchanged, between
Par value Share issuance for cash knowledgeable and willing parties in an arm’s length transaction. The fair value of
Issuing Share capital at Par: the shares is determined using the following three-tier measurement hierarchy:
Cash xxx (1) observable market prices, if available, (2) market data with reference to a recent
Ordinary Shares xxx transaction in the entity’s shares, or (3) a recent independent fair valuation of the
Issuing Share Capital above Par: entity or its principal assets.
Cash xxx
Ordinary Shares xxx llustration share-based payments to non-employees (Shares for assets)
Share Premium xxx ABC Corporation is a medium-sized, closely held entity based in Bulacan. A group
Issuing Share without stated value: of foreign investors would like to acquire shares of the corporation because of its
Cash xxx tremendous earnings potential. After much internal discussions initiated by its
Ordinary Shares xxx chairman, Mr. A, and its president, Mr. B, the investors were allowed to make
 7

investments. One of the considerations given was a tract of land in Pampanga with Employee Benefits Expense (or Salary Expense) 780,000
a fair value of P15,000,000. Share Options Outstanding 780,000
To record the issuance of 12,000 shares at P1,000 par ordinary shares in exchange 100 shares x (1,000 – 120 actual – 100 estimate) x P30 x 1/3 = 780,000
for the land is as follows: December 31, 2020:
Land 15,000,000 Employee Benefits Expense (or Salary Expense) 700,000
Ordinary Shares 12,000,000 Share Options Outstanding 700,000
Share Premium 3,000,000 100 shares x (1,000 – 120 actual – 90 actual – 50 estimate) x P30 x 2/3 = 1,480,000
To record the issuance of 12,000 ordinary shares for land. Accrual for 2020 = P1,480,000 – P780,000 (2019) = P700,000
In the preceding illustration, assuming that the fair value of the ABC Ordinary December 31, 2021:
shares is P1,200 per share, the basis to record the acquisition of the land will still be Employee Benefits Expense (or Salary Expense) 710,000
fair value of the asset (“Share-based payments to non-employees are measured Share Options Outstanding 710,000
at fair value of the goods or services received). However, if only the fair value of 100 shares x (1,000 – 120 actual – 90 actual – 60 actual) x P30 x 3/3 = P2,190,000
the ordinary shares issued is objectively determinable, then it will be the basis for Accrual for 2021 = P2,190,000 – P1,480,000 = P710,000
recording the acquisition of the land. The share options can be exercised by the remaining (1,000 – 120- 90 – 60) 730
Illustration share-based payments to non-employees (Shares for services) directors and employees starting January 1, 2022 and expire on January 1, 2023. If
ABC Corporation is a medium-sized, closely held entity based in Bulacan. The the P100 par value ordinary shares can be acquired at P110 per share and all the
entity engaged the services of a promoter during its formation and organization. share options were exercised during 2022, the journal entry is as follows:
The corporation issued 900 shares of P100 par value ordinary shares for the Cash (100 shares x 730 employees x P110) 8,030,000
services. The fair value of such services is P100,000. The entry will be: Share Options Outstanding 2,190,000
Organization Expense 100,000 Ordinary Shares (100 shares x 730 employees x P100 par) 7,300,000
Ordinary Shares 90,000 Share Premium 2,920,000
Share Premium 10,000 Note: If the equity instrument vests immediately, the entity shall recognize the
To record the issuance of 900 ordinary shares in exchange services of the employee benefits expense in full and the increase in equity on grant
for services. date (IFRS 2, par. 14)
Note: When shares are issued for services in connection with the incorporation, the Cash-settled share-based payments to employees
Organization Expense account may be debited at an amount equal to the fair For cash-settled share-based payment transactions, the entity should measure the
value of such services (IFRS 2, par. 10). Shares shall not be issued for future goods or services acquired and the liability incurred at the fair value of the
services. If ordinary shares is issued for an outstanding liability, the amount of the liability. Until the liability is settled, the liability is remeasured to fair value at the
liability should be he measure for recording. of the reporting period and the at the date of settlement. Any changes in fair value
are recognized in profit or loss for the period.
Share-based payments to employees Shareholders’ equity using journal entry method
Share plans and share options are an increasing common feature of renumeration Authorized Ordinary Shares, P100 par, 4,000 shares P400,000
for directors, senior managers and other key personnel. It is a means of aligning Less Unissued Ordinary Shares, 3,000 shares 300,000
employees’ interest with those of the shareholders and encouraging employee Issued Ordinary Shares, 1,000 shares at P100 par P100,000
retention. A share option is a right, but not an obligation, to subscribe to an entity’s Subscribed Ordinary Shares P40,000
share at a specified price at a specified time in the future. Less: Subscription Receivable 40,000
Definition of terms -
 The grant date is the date at which the entity and another party (including
the employees) agree to a share-based arrangement. At grant date, the entity Ordinary Shares, P100 par, 4,000 shares authorized,
confers on the counterparty the right to cash or equity instruments of the 1,000 shares issued P100,000
entity, provided the specified vesting conditions, if any, are met. Subscribed Ordinary Shares P40,000
 To vest means to become an entitlement. Under a share-based payment Less: Subscription Receivable 40,000
arrangement, a counterparty’s right to receive cash or equity instruments of -
the entity vests when the counterparty’s entitlement is no longer conditional
on the satisfaction of any vesting conditions. The vesting date is when the Accounting for treasury stocks
cash or equity instruments granted vest. Treasury stock are shares of stock which have been issued and fully paid, but
 The vesting period is the period during which all the specified vesting subsequently reacquired by the issuing corporation either by purchase, redemption,
conditions of a share-based payment arrangement are to be satisfied. donation or through other law means. Such shares may again be disposed of for a
 Vesting conditions are the conditions that determine whether the entity reasonable price fixed by the board of directors.
receives the services that entitle the counterparty to receive cash or equity Section 40 of RCCP provides that a stock corporation has the power to purchase its
instruments of the entity, under a share-based payment arrangement. own shares for a legitimate purpose provided it has unrestricted retained earnings.
Some of the reasons for the purchase of treasury stock are as follows: (1) to
On January 1, 2019, ABC Corporation granted 100 share options to each of its 15 eliminate fractional shares arising out of share dividends; (2) to pay dissenting or
directors and 985 other employees on the condition that they reman with the entity withdrawing shareholders entitled to payment for their shares.
for the next three years. The fair value of each share option at January 1,2019 is Paragraph 33 of International Accounting Standards *IAS) No. 32, Financial
P30. The 15 directors and 985 other employees are expected to remain with the Instruments: Presentation, states that, if an entity reacquires its own equity
entity for the next three years. Each P100 par value can be acquired at P110. instruments, these instruments (“treasury shares”) shall be deducted from equity.
Directors and Employees can exercise the share options anytime from January 1, No gain or loss shall be recognized in profit or loss on the purchase, sale, issue or
2022 to December 31, 2022. cancellation of an entity’s own equity instruments. Such treasury shares may be
Grant Date is January 1, 2019. acquired and held by the entity or by other members of the consolidated group.
Vest is 100 share options to each director and each employee Consideration paid or received shall be recognized directly in equity.
Vesting period is from January 1, 2019 to December 31, 2021. Treasury stock is not an asset because the corporation may not owns shares of
Vesting condition is services of the directors and employees during the vesting itself. To reiterate, it is reported as a deduction from the total shareholders’ equity.
period. There are two methods of accounting for treasury stock transactions, namely: (1)
Total expense = 100 shares x (15 directors + 985 employees) x P30 = par or stated value method, and (2) cost method. In the first method, treasury stock
P3,000,000 is debited for an amount equal to the par or stated value of the stock reacquired.
Assuming all the 15 directors and 985 employees rendered services during the The cost method is the preferred method of accounting for treasury stocks by
vesting period, the journal entries to recognize the effect of equity-settled share the Accounting Standards Council as stated in SFAS No. 18, par. 6. Only the
options are as follows: cost method will be illustrated
December 31, 2019: Treasury Stock 3,000,000
Employee Benefits Expense 1,000,000 Cash 3,000,000
Share Options Outstanding 1,000,000 To record acquisition of 1,500 treasury shares with P1,000
December 31, 2020: par value for P2,000 each.
Employee Benefits Expense 1,000,000 Cash 3,000,000
Share Options Outstanding 1,000,000 Treasury Stock 3,000,000
December 31, 2021: To record reissue of treasury shares at cost.
Employee Benefits Expense 1,000,000 Cash 3,750,000
Share Options Outstanding 1,000,000 Treasury Stock 3,000,000
The share options can be exercised by the directors and employees starting January Share Premium – Treasury 750,000
1, 2022 and expire on January 1, 2023. If the P100 par value ordinary shares can To record reissue of 1,500 treasury shares at P2,500 per
be acquired at P110 per share and all the share options were exercised during 2022, share. (ABOVE COST)
the journal entry is as follows: Cash 2,250,000
Cash (100 shares x 1,000 employees x P110)11,000,000 Retained Earnings 750,000
Share Options Outstanding 3,000,000 Treasury Stock 3,000,000
Ordinary Shares (100 shares x 1,000 employees x P100 par) To record reissue of 1,500 treasury shares at P1,500 per
10,000,000 share. (BELOW COST)
Share Premium 4,000,000 Ordinary Shares 1,500,000
Retained Earnings 1,500,000
Treasury Stock 3,000,000
Impact employees’ share options on entity’s financial statements To record retirement of 1,500 treasury stock with P1,000
Let us assume that during 2019, 120 employees actually left the entity. At par value, acquired at P2,000 each. (Assume that original issue price was at par.)
December 31, 2019, the entity estimates that another 100 of its employees will The “loss” on retirement of P1,500,000 should be debited to the following accounts
leave during the next 2 years to December 31, 2021. During 2020, 90 employees in the order given:
actually left the entity and the entity estimates that 50 employees would leave (1) Share Premium to the extent of the credit when the share is issued.
during the year to December 31, 2021. During 2021, 60 employees actually left the (2) Share Premium from Treasury Stock transactions of the same class
entity. of shares.
How will now this affect the entries every year? (3) Retained Earnings.
December 31, 2019:
 8

 illustration Total Shareholders’ Equity P14,400,000

The accounts below appeared in the trial balance of GSS Corporation as at
December 31, 2019: Convertible preference shares
Ordinary Shares, P100 par, 20,000 shares If the preference shares are all converted into ordinary shares in a 1:3 ratio, the
authorized, 18,000 shares issued P1,800,000 entries:
Share Premium 950,000 Preference Shares (10,000 shares at P200 par) 2,000,000
Subscription Receivable 115,000 Share Premium – Preference 400,000
Subscribed Ordinary Shares 180,000 Ordinary Shares (10,000 shares x 3 x P60 par) 1,800,000
Retained Earnings 2,000,000 Share Premium – Ordinary 600,000
Treasury Stock, 1,000 shares at cost 200,000 Note: When convertibility is not provided in the articles of incorporation, the
illustration preference shares cannot be converted into ordinary shares.
1. Total authorized ordinary shares: 20,000 shares x P100 par = Recapitalization
P2,000,000
2. Total unissued ordinary shares: 2,000 shares x P100 par = P200,000 This is manifested when there is a change in the capital structure of the corporation.
3. Total issued ordinary shares: 18,000 shares x P100 par = P1,800,000 The typical capitalization are as follows:
4. Ordinary shares subscribed: 1,800 shares x P100 par = P180,000 a. Change from Par to No-Par
5. Total Shareholders’ Equity: b. Change from No-Par to Par
c. Reduction of Par Value
Ordinary Shares P1,800,000 d. Reduction of Stated Value
Share Premium 950,000 Change from Par to No-Par
Subscribed Ordinary Share P180,000 Illustration. Following is the shareholders’ equity of a corporation:
Less Subscription Receivable 115,000 Ordinary Shares, P50 par value, 50,000 shares P2,500,000
Retained Earnings 2,000,000 Share Premium 250,000
Total P4,915,000 Retained Earnings 1,250,000
Less Treasury Stock 200,000 Total Shareholders’ Equity P4,000,000
Total Shareholders’ Equity P4,715,000 If all the par value shares are cancelled and replaced with the same number of
shares of P25 stated value shares, the recapitalization entries will be:
6. Number of shares issued: 18,000 shares (given) Ordinary Shares (50,000 shares at P50 par) 2,500,000
7. Number of shares subscribed: P180,000/P100 par = 1,800 shares Share Premium 250,000
8. Number of treasury shares: 1,000 shares (given) Ordinary Shares (50,000 shares at P25) 1,250,000
9. Number of shares outstanding: 18,000 issued – 1,000 treasury = 17,000 Share Premium – Recapitalization 1,500,000
shares Change from No-Par to Par
Summary of the effects on assets, liabilities, and equity Illustration. Following is the shareholders’ equity of a corporation:
Transactions Assets Liabilities Shareholders’ Equity Ordinary Shares, no-par value, 50,000 shares P2,500,000
Issuance of Increase No effect Increase Retained Earnings 1,250,000
Shares Total Shareholders’ Equity P3,750,000
 recapitalization
Purchase of Decrease No effect Decrease If all the no-par value shares are cancelled and replaced with the same number of
Treasury Stock shares of P75 par value shares, the recapitalization entries will be:
Ordinary Shares (50,000 shares no-par) 2,500,000
Re-issuance of Increase No effect Increase
Retained Earnings 1,250,000
Treasury Stock
Ordinary Shares (50,000 shares at P75) 3,750,000
Donated capital
Reduction of Par Values
Contributions, including shares of the corporation, received from shareholders,
Illustration. Following is the shareholders’ equity of a corporation:
should be recorded at the fair market value of the items received, with the credit
Ordinary Shares, P100 par value, 25,000 shares P2,500,000
going to share premium. If significant, such contributions may be designated as
Share Premium 250,000
donated capital. If the donations is in the form of shares of the corporation, the
Retained Earnings 1,000,000
amount share premium or donated capital is credited at the time the shares are
Total Shareholders’ Equity P3,750,000
reissued.
recapitalization
Illustration. Jocker’s Food Industries Inc. received a new service van from its
If the par value is reduced to P80, the recapitalization entries will be:
major shareholder as a gift. The donated asset has a cash price of P350,000. The
Ordinary Shares (25,000 shares x P20) 500,000
entry will be as follows:
Share Premium – Recapitalization 500,000
Service Vehicle 350,000
Reduction of Stated Values
Donated Capital 350,000
Illustration. Following is the shareholders’ equity of a corporation:
Illustration. Jocker’s Food Industries Inc. received 500 of P100 par value ordinary
Ordinary Shares, P100 stated value, 25,000 sharesP2,500,000
shares from its major shareholders as a gift. The entry will be as follows:
Retained Earnings 1,000,000
“Received 500 ordinary shares as donation.”
Total Shareholders’ Equity P3,500,000
Assume that the 500 shares were issued at P80 per share, the entry will be:
If the stated value is reduced to P80, the recapitalization entries will be:
Cash 40,000
Ordinary Shares (25,000 shares x P20) 500,000
Donated Capital 40,000
Share Premium – Recapitalization 500,000
Callable preference shares
Accounting for corporation – retained earnings
Callable preference shares give the issuing corporation the right to purchase (retire)
Retained earnings
the shares from its holders at a specified price. The amount paid to call and retire a
This represents the component of the shareholders’ equity arising from the retention
preference share is its call price. It is important to state that the redemption date is
of assets generated from the profit-directed activities of the organization. At the
not definite for it is dependent on the corporation exercising its “call”
end of the accounting period, the Income Summary account is closed to the
Illustration. A corporation issued 10,000 callable P50 par value preference shares
Retained Earnings account. The retained earnings account is credited with the
for P60 per share. The entry will be:
corporation’s profit or debited with the loss.
Cash (10,000 shares at P60) 600,000
The basic source of retained earnings is profit. Distributions to shareholders of
Preference Shares (10,000 shares at P50)500,000
cash, property or stocks, from unrestricted retained earnings on the basis of
Share Premium – Preference 100,000
all issued and fully paid shares, and all subscribed par value shares except
Later, the shares were called in at P75 per share. The entry will be:
treasury shares are called dividends. Dividend declarations reduce retained
Preference Shares 500,000
earnings.
Share Premium – Preference 100,000
Causes to increase/decrease retained earnings:
Retained Earnings 150,000
1 Increase due to profit.
Cash 750,000
2 Decrease due to dividends.
3 Decrease resulting from reissuance of Treasury stocks below cost
Redeemable preference shares
4 Loss on retirement of treasury stocks
A preference share that provides for mandatory redemption by the issuer for a fixed
5 Increase/Decrease for prior period errors.
or determinable amount at a fixed or determinable future date or gives the holder
the right to require the issuer to redeem the instrument at or after a particular date
Prior period errors
for a fixed or determinable amount, is a financial liability.
These are errors discovered in the current period that are of such significance that
The entry to record issuance of redeemable preference shares is as follows:
the financial statements of one or more prior periods can no longer be considered to
Cash (1,000 shares at P1,000 each) 1,000,000
have been reliable at the date of their issue. Note that credit entries increase the
Redeemable Preference Shares Liability 1,000,000
retained earnings balance and debits decrease it.
Preference share is more attractive to investors if it carries a right to exchange
A debit balance in the retained earnings from accumulated losses is called a deficit.
preference shares for a fixed number of ordinary shares. When a corporation
Retained earnings may be restricted or appropriated, and unrestricted or
prospers and its ordinary shares increases its value, convertible preference
unappropriated. Unrestricted retained earnings are free and can be declared as
shareholders can share in this success by converting into the more valuable
dividends. Retained earnings restrictions may be legal, contractual or voluntary.
ordinary shares.
Illustration.
Dividends
Preference Shares, P200 par value, 10,000 shares P 2,000,000
Retained Earnings is not a cash fund waiting to be distributed as dividends.
Ordinary Shares, P60 par value, 200,000 shares
Instead, it is an owners’ equity account representing claim on all assets in general
authorized, 100,000 shares outstanding 6,000,000
and not on any asset in particular. In fact, the corporation may have a sizeable
Share Premium – Preference 400,000
balance in their account but may not have cash to pay a cash dividend.
Share Premium – Ordinary 2,000,000
Shareholders are not guaranteed dividends and dividends do not become a
Retained Earnings 4,000,000
 9

liability of the corporation until the board of directors has formally declared a These are dividends in which the additional shares issued are less than 20% of
dividend distribution. the previously outstanding shares. These share dividends are recorded by
Three (3) important dates transferring from retained earnings to share capital (ordinary share and share
in the declaration and payment of dividends premium accounts) the fair market value of the additional shares to be issued. In
1. Date of Declaration cases when the fair market value is lower than the par or stated value, the par or
2. Date of Record stated value will be the basis for recording. The entry:
3. Date of Payment Retained Earnings xxx
Ordinary Shares (at par or stated value) xxx
Date of declaration Share Premium (excess FMV over par or SV) xxx
On the date of declaration, the board of directors will adopt a resolution declaring Illustration. Siobe! Your Japanese Fastfood, Inc. chain is blessed with years of
that a dividend is to be paid. The resolution will specify the amount, type and profitable operations for its commitment to serve affordable and healthy Japanese
date of payment of this dividend. It will also set a date of record. Cash food favorites. The shareholders’ equity before declaration of a 10% share
dividends are declared solely by the board of directors while share dividends will dividend is as follows:
necessitate the concurrence of at least two-thirds of the outstanding shareholders. Ordinary Shares, P50 par, 20,000 shares
Legally, declared dividends are obligations of the firm. Dividends to be paid in issued and outstanding P1,000,000
cash or property become a liability on this date. Share Distributable is also Share Premium 200,000
recognized. An entry is made as follows: Total Share Capital P1,200,000
Ex. Retained Earnings Retained Earnings 650,000
Cash Dividends Payable, or Total Shareholders’ Equity P1,850,000
Property Dividends Payable, or
Share Distributable
The declaration of a 10% share dividend will require the issuance of an additional
Date of record 2,000 shares. Assume that the corporation’s share is being traded at the stock
A list of shareholders entitled to the declared dividends is prepared at the date of exchange and that the stock market price per share is P110. The fair market value
record. If an investor buys a share of stock after this date, he will not receive of the shares to be distributed is P220,000. The entries will be:
the dividend. The share is said to be traded ex-dividend. No entry is required on Retained Earnings (2.000 shares x P110 FMV) 220,000
this date. Shares Distributable (2,000 shares x P50 par) 100,000
Share Premium 120,000
Date of payment To record declaration of 10% share dividend.
The corporation settles its liability on this date. Shares Distributable 100,000
An entry is made as follows: Ordinary Shares 100,000
Ex.Cash Dividends Payable To record issuance of share dividends.
Cash Large share dividends
Property Dividends Payable If the share dividend is 20% or more of the previously outstanding shares, such that
Noncash assets the effect is to reduce materially the market value per share, then only the par or
Share Distributable stated value is credited to ordinary shares with a corresponding debit to retained
Share Capital earnings.
Retained Earnings xxx
Cash dividends Ordinary Shares (at par or stated value) xxx
Majority of dividends distributed by corporations is paid in cash. In declaring Illustration. Assumed instead that Siobe! Japanese Fastfood, Inc. chain declared a
cash dividends, a corporation must have both an appropriate amount of 20% share dividend on its 20,000 issued and outstanding P50 par value shares. The
retained earnings and the necessary amount of cash. Some investors view that a corporation will issue additional 4,000 shares due to the share dividend. The
large retained earnings balance automatically permits generous dividend entries will be
distributions. Retained Earnings (4.000 shares x P50 par) 200,000
Dividends on par value shares are stated as a certain percentage of the par value. Shares Distributable 200,000
As to no-par value shares, the dividends are stated at a certain amount per share. To record declaration of 20% share dividend.
When the board of directors declares a cash dividend, an entry is made as follows: Shares Distributable 200,000
Retained Earnings xxx Ordinary Shares 200,000
Cash Dividends Payable xxx To record issuance of share dividends.
Illustration. Made Easy Bookstore, Inc., a nationally-known business books Liquidating dividends
distribution entity, declared a cash dividend of P12 per share of ordinary shares on Liquidating dividends are not distribution of earnings but rather returns of
July 1. The dividends are payable on August 1 to shareholders of record on July capital to the investing shareholders. This type of dividend can be legally paid
21. The entity has 100,000 ordinary shares issued of which 7,000 shares are held in only under either of the following circumstances:
treasury. (1) when the corporation is under dissolution and liquidation, or
Retained Earnings [(100,000 shares – 7,000 treasury)xP12]1,116,000 (2) when the corporation is engaged in the exploration of natural resources.
Cash Dividends Payable 1,116,000 Share splits
To record declaration of dividends on July 1. Corporations reduce the par or stated value of its share capital and issues additional
Cash Dividends Payable 1,116,000 shares to its shareholders through the practice referred to as share splits. The par
Cash 1,116,000 or stated value per share will decrease with a corresponding increase in the
To record payment of dividends on August 1. number of authorized, issued and outstanding shares. In effect, there is no
change in the balances of the shareholders’ equity accounts.
Property dividends When shares are selling below a desired price when management wishes to take
A distribution to shareholders that is payable in non-cash assets is generally control of the entity, the corporation may consider a reverse split that can be
referred to as property dividends or dividends in kind. Per IFRIC 17, paragraph 11, accomplished by increase the par or stated value of its shares and reducing the
an entity shall measure a liability to distribute non-cash assets as a dividend to shares outstanding. There will no journal entry required; a memo entry is
its owners at the fair value of the assets to be distributed. sufficient.
Illustration. 3S Food Industries based in Pulilan, Bulacan has 5,000 shares Illustration. The International School of Business and Sciences, Inc. has 10,000
investment in another entity accounted for as nonmarketable equity investment. P100 par value ordinary shares issued and outstanding when the board of directors
The carrying amount of this investment is P500,000. On Dec. 1, 2019, this growing decided to split the share 5-for-1. This means that a shareholder would receive five
food corporation declared as property dividends this investment to all its shares with new par value of P20 for each share held. Ordinary shares will
outstanding par value shares to be distributed on Dec. 15, 2019. The fair market remain unchanged at P1,000,000. The issued and outstanding shares will now
value of the investment at the declaration date was P950,000. There was no change be 50,000 and the par value reduced to P20 per share.
in fair value on settlement date. See the entries in the next slide. Summary of the effects of dividends and share split
The entries are as follows: Features of preference shares
Retained Earnings 950,000 1. Non-cumulative and Non-participating
Property Dividends Payable 950,000 2. Non-cumulative and Participating
To record declaration of dividend on Dec. 1, 2019 3. Cumulative and Non-participating
Property Dividends Payable 950,000 4. Cumulative and Participating
Investment in Equity Securities 500,000  Non-cumulative preference shares. These shares entitle the holders only to
Gain on Distribution of Property Dividend 450,000 the payment of current dividends, if and when dividends are declared to the
To record distribution of dividend on Dec. 15, 2019. extend of the preference rate, before the ordinary shareholders are paid. If
there is no dividend declaration for a certain year, then the dividend for that
Share dividends year is forfeited.
A corporation may distribute to shareholders additional shares of the entity’s own  Non-participating preference shares. These shares entitle the holders only
share as share dividends. Share dividends or bonus issues are fundamentally to the extend of the stipulated preference dividend (expressed as percentage
different from cash or property dividends because share dividends do not transfer of par value).
assets to the shareholders. This type of dividend affects only the accounts within  Cumulative preference shares. These shares entitle the holder to payment
the shareholders’ equity. Share dividends increase the total share capital and not only of the current dividends but also back dividends or dividends in
decreases the retained earnings account. Because both of these are components arrears, if and when dividends are declared, before the ordinary shareholders
of shareholders’ equity, total shareholders’ equity is unchanged. are paid.
From the shareholders’ point of view, a share dividend does not change their  Participating preference shares. These shares entitle the holders to
percentage of interest in the corporation, although total outstanding shares have participate with the holders of ordinary shares pro-rata in the remainder after
increased. The accounting entries depend upon the size of the share dividend as the ordinary shareholders have received their initial share based on the
follows: preference rate.
1. Small Share Dividends
2. Large Shares Dividends Dividends on preference and ordinary shares
Small share dividends A corporation may issue both preference and ordinary shares. Preference shares
enjoy preference as to dividends. When the board of directors declares cash
 10

dividends, preference shareholders are entitled to dividends before ordinary

shareholders receive any distribution.
The dividend is stated as a percentage of the par value preference shares. Thus,
holders of 7% Preference Shares, P100 par value, are entitled to an annual dividend
of P7 per share before any distribution is made to the ordinary shareholders.
Illustration. DomDane Publishers, Inc., the premier publisher of accounting,
finance, economics, math, taxation, entrepreneurship and other business textbooks,
has the following selected accounts in its shareholders’ equity:
12% Preference Shares, P100 par, authorized
4,000 shares; 2,000 shares issued and outstanding P200,000
Ordinary Shares, P100 par, authorized 6,000 shares;
3,000 shares issued and outstanding 300,000
Retained Earnings 260,000
The board failed to declare dividends for the past two (2) years. The current year’s
result of operation gave the board reasons to declare cash dividends of P200,000.

Book value per share

Book value per share is the amount that would be paid on each share if the
corporation is liquidated. The amount available to shareholders is exactly the
amount reported as shareholders’ equity.
The preference shareholders have the right to receive assets equal to the par value
or a larger stated liquidated value per share.
The book value per share of the preference shares is the sum of its liquidation
value, if applicable, plus any current and dividends in arrears divided by the
number of preference shares outstanding.
Ordinary shareholders’ equity is obtained by deducting from total
shareholders’ equity the preference shareholders’ equity. The book value per
share of the ordinary shares is computed by dividing the ordinary shareholders’
equity by the number of ordinary shares outstanding.
Illustration. Roberto D. Gonzales Admark, Inc. is one of the leading firms doing
highly creative tri-media product exposures in Metro Manila and Calabarzon. The
shareholders’ equity section of the statement of financial position is as follows:
6% Cumulative Non-participating Preference Shares,
P1,000 par, 5,000 shares authorized, 400 shares
issued and outstanding P 400,000
Ordinary Shares, P100 par, 20,000 shares authorized,
5,500 shares issued and outstanding 550,000
Share Premium – Preference 40,000
Share Premium – Ordinary 720,000
Retained Earnings 850,000
Total Shareholders’ Equity P2,560,000

Book value per preference share

Suppose that the preference shares has a liquidation value of P1,300 and
dividends are in arrears for three years. The computation of the preference book
value per share follows:
Liquidation value: 400 shares x P1,300 = P520,000
Dividends in arrears: P400,000 x 6% x 3 years = 72,000
Current year dividend: P400,000 x 6% = 24,000
Preference Shareholders’ Equity P616,000
Book value per share: P616,000 / 400 shares = P 1,540
 Book value per ordinary share
Total Shareholders’ Equity P2,560,000
Less Preference Shareholders’ Equity 616,000
Ordinary Shareholders’ Equity P1,944,000
Book value per share: P1,944,000 / 5,500 shares = P353.45
 Book value per share
Book value per share may be used as the initial bargaining price in negotiating
the purchase of a corporation whose shares are not traded in the stock
exchange. On one hand, investors in the stock market may utilize book value as
one of the bases for evaluating whether a stock is undervalued or not. It is also
significant in many contracts and in court cases where the rights of the individual
parties are based on cost information.