SIR KM’S PARTNERSHIP & CORPORATION | PARTNERSHIP FORMATION
CHAPTER ONE
PARTNERSHIP is a contracts between two or more persons binding themselves to contribute money, property, or industry
to a common fun with the intention of dividing profits among themselves.
CHARACTERISTICS OF PARTNERSHIP








Ease of Formation
Mutual Contribution
Division of Profits or Losses
Co-Ownership of Contributed Assets
Mutual Agency
Limited Life
Unlimited Liability (General Partners)
Income Taxes






ADVANTAGES
More Capital Available
Better Management
More Interests in Business
Simple Organization
Low Taxes
A Partnership has access to greater or better credit
standings





DISADVANTAGES
Risk of Dissolution
Possibility of Disagreement
Unlimited Liability
Limited in Size
General Agency
ELEMENTS OF PARTNERSHIP




Consensual – need of consent
Bilateral – 2 or more
Onerous – you give
Commutative – you receive
ESSENTIAL REQUISITES OF A PARTNERSHIP
1.
2.
3.
4.
5.
There must be a valid contract.
The parties must have a legal capacity to enter the contract.
There must be a mutual contribution of money, property, or industry to a common fund.
The object must be lawful.
The purpose or primary purpose must be to obtain profits and to divide the same among the parties.
EFFECTS OF AN UNLAWFUL PARTNERSHIP
1.
2.
3.
4.
The contract is void and the partnership never existed in the eyes of the law.
The profits shall be confiscated in favour of the government.
The instruments or tools and proceeds of the crime shall also be forfeited in favour of the government.
The contributions of the partner shall not be confiscated unless they fall under no. 3.
CLASSIFICATION OF PARTNERSHIP

According to Object
o Universal Partnership of All Present Property – all contributions = part of the partnership fund
o Universal Partnership of All Profits – all that the partners may acquire by their industry or work during the
existence of the partnership and the use of whatever the partners contributed at the time of the institution
of the contract belong to the partnership

According to Liability
o General Partnership – all partners are liable to the extent of their separate properties
SIR KM’S PARTNERSHIP & CORPORATION | PARTNERSHIP FORMATION
o
Limited Partnership – the limited partners are liable only to the extent of their personal contributions. In a
limited partnership, the law states that there shall be at least one general partner.

According to Duration
o Partnership with a Fixed Term or For a Particular Undertaking
o Partnership at will – one in which no term is specified and is not formed for any particular undertaking

According to Purpose
o Commercial or Trading Partnership – one formed for the transaction of business
o Professional or Non-Trading Partnership – one formed for the exercise of profession

According to Legality of Existence
o De Jure Partnership – one which has complied with all the legal requirements for its establishments
o De Facto Partnership – one which has failed to comply with all the legal requirements for its establishments
KINDS OF PARTNERS

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
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




Legal Partner
Managing Partner
Limited Partner
Liquidating Partner
Capitalist Partner
Dormant Partner
Silent Partner
Industrial Partner
Secret Partner
Nominal Partner or Partner by Estoppel
ACCOUNTING FOR PARTNERSHIPS


Partners Loan to the Partnership
Partners Receivable Account
PARTNERSHIP TRANSACTIONS
1. Cash Contributions ONLY by the partners
2. Cash and Non-Cash Contributions by Partners:
When non-cash assets are invested, they should be recorded at its fair value or appraised value. Fair Market Value
is the amount, which the seller will receive for selling non-cash assets at the present time and its present condition.
3. Cash Contributions by One Partner and Services to be Contributed by One Partner
4. Non-Cash Assets Contributions by the Partner with Outstanding Balance to be Assumed by the Partnership
5. A Sole Proprietor and an Individual Form a Partnership
In this case, one of the expected partners is already engaged in business prior to the formation of the partnership.
In this case, the partner may transfer his assets and liabilities (net assets) to the partnership at agreed values or at
fair market values if there are no agreed values. The partnership may either: 1) Use the books of the sole
proprietor, or 2) Open new set of books.
When individual set of books are kept by each partner or by any one of the partners, entries are made on the
separate books of the partners for adjustments to the recorded values. The adjustments are made through Capital
Account. The Capital Account is credited for increases in the value of the net assets and is debited for decreases
in the value of the net assets.
6. Two or More Sole Proprietors Form a Partnership
When all the prospective partners are already in the business, they may decide to transfer their assets and liabilities
to the partnership at agreed values upon at fair market values.
SIR KM’S PARTNERSHIP & CORPORATION | PARTNERSHIP OPERATIONS
CHAPTER TWO
DISTRIBUTION OF PROFITS AND LOSSES
1. Services Rendered by the Partners to the Partnership
2. Amount of Capital Contributed by the Partners to the Business
3. Entrepreneurial Ability or Managerial Skills of the Partners
WAYS TO COMPUTE
1.
2.
3.
4.
Percentage
Fraction
Decimal
Ratio
RULES FOR DIVIDING PROFITS AND LOSSES
Agreement
Division of
Profits
CAPITALIST
PARTNER
Agreement
Division of
Profits
Capital
Contributions
Agreement
INDUSTRIAL
PARTNER
Capital
Contributions
Agreement
Division of
Losses
Same with
Profits
Capital
Contributions
METHODS OF DISTRIBUTING PROFITS BASED ON PARTNER’S AGREEMENT
1. Equally
2. Arbitrary Ratio
a. Percentage
b. Decimal
c. Fraction
d. Ratio
3. Capital Ratio
a. Beginning Capital
b. Average Capital
c. Ending Capital
4. Interest on Capital and the Balance on the Agreed Ratio
5. Salary Allowances to Partners and the Balance on Agreed Ratio
Division of
Losses
No Share in
Losses
SIR KM’S PARTNERSHIP & CORPORATION | PARTNERSHIP DISSOLUTION
CHAPTER THREE
Article 1828 – The Dissolution of a partnership is the change in the relation of the partners caused by any partner ceasing
to be associated in the carrying on as distinguished from the winding up of the business.
Article 1829 – On Dissolution, the partnership is not terminated, but continues until the winding up of the partnership affairs
is completed.
For accounting purposes, the change in the relationship of the partners brought about by the following:
1.
2.
3.
4.
Admission of a new partner by a transfer of old partner to a new partner
Withdrawal or retirement of a partner by sale of equity or interest to the remaining partners
Withdrawal or retirement of a partner by sale of equity or interest to a new partner
Death, Insolvency, or Incapacity of a partner
ADMISSION OF A NEW PARTNER

Admission by PURCHASE
With the consent of all the partners, a new partner may be admitted in an existing partnership by purchasing a
capital equity interest directly from one or more of the old partners. Also, the interest of the retiring partner may be
acquired by the remaining partners. The partnership recognizes only the transfer of capital interest from the retiring
partner to the acquiring partner or partners.
ENTRY:
(Name of Seller), Capital
(Name of Buyer), Capital
xxx
xxx
The purchase price of the interest sold to the new partner may be:
1. Equal to the book value of interest sold
2. Less than the book value of interest sold
3. More than the book value of interest sold
The new partner may pay more than or less than the book value of the interest sold by the old partner resulting in
a gain or loss in the transaction. The gain or loss is a personal gain or loss of the selling partner and not of the
partnership. Therefore, no gain or loss is recognized in the partnership books.
REMEMBER: IGNORE THE PRICE, RECORD THE INTEREST OR CAPITAL!
EXAMPLE 1: SALE OF EQUITY/INTEREST TO A NEW PARTNER
Kolokoy and Butchokoy are partners with capital balances of P200,000 and P320,000 respectively on May 2021.
They share profits and losses equally. Bachoy is a new partner.
o
Case 1: Purchase at book value from one partner only. Bachoy purchases 2/5 interest from Kolokoy by
paying P80,000.
May
o
Kolokoy, Capital
Bachoy, Capital
80,000
80,000
Case 2: Purchase at book value from more than one partner. Bachoy purchases 2/5 interest from the
Old Partners by paying P208,000.
May
o
1
1
Kolokoy, Capital
Butchokoy, Capital
Bachoy, Capital
80,000
128,000
208,000
Case 3: Purchase at less than book value. Bachoy purchases 2/5 interest from the Old Partners by
paying P190,000.
May
1
Kolokoy, Capital
Butchokoy, Capital
Bachoy, Capital
80,000
128,000
208,000
SIR KM’S PARTNERSHIP & CORPORATION | PARTNERSHIP DISSOLUTION
The P190,000 paid by Bachoy to Kolokoy and Butchokoy should not be reflected in the partnership books
because the said amount was paid directly to the partners. The difference of P18,000 is a personal loss of
the selling (old) partners.
o
Case 4: Purchase at more than book value. Bachoy purchases 2/5 interest from the Old Partners by
paying P250,000.
May
1
Kolokoy, Capital
Butchokoy, Capital
Bachoy, Capital
80,000
128,000
208,000
The P250,000 paid by Bachoy to Kolokoy and Butchokoy should not be reflected in the partnership books
because the said amount was paid directly to the partners. The excess of P42,000 is a personal gain of the
selling (old) partners.
EXAMPLE 2: SALE OF EQUITY/INTEREST TO REMAINING PARTNERS
The following are the ending capital balances of the three partners for the month of June 2021:
DING
DONG
DHING DHING
P45,000
P32,000
P36,000
o
Case 1: Dong sold his interest to Ding and Dhing Dhing for P30,000 on June 15; the interest being divided
equally by the remaining partners.
June
o
15
Dong, Capital
Ding, Capital
Dhing Dhing, Capital
32,000
16,000
16,000
Case 2: Dong sold his interest to Dhong Dhong for P50,000
June
15
Dong, Capital
Dhong Dhong, Capital
32,000
32,000
The gain of P18,000 is a personal gain of Dong since the sale of the interest to an outsider is a personal
transaction between the buying partner and Dong.

Admission by INVESTMENT
A person may be admitted into a partnership by investing cash or other assets in the business. The assets are
invested into the partnership and not given to the individual partners.
TERMS:
o Total CONTRIBUTED Capital – it is the sum of the capital balances of the old partners and the actual
investment of the new partner.
o
Total AGREED Capital – it is the total capital of the partnership after considering the capital credits given to
each of the partners. Under the bonus method, total agreed capital is equal to the total contributed
capital.
 Bonus to Old Partners
 Bonus to New Partners
DEATH, INSOLVENCY, & INCAPACITY OF A PARTNER
Article 1831 – On application by or for a partner, the court shall decree Dissolution whenever:
1. A partner has been declared insane in any judicial proceeding or is shown to be of unsound mind.
2. A partner becomes in any other way incapable of performing his part of the partnership contract.
3. A partner has been guilty of such conduct as tends to affect prejudicially the carrying on of the business.
4. A partner wilfully or persistently commits a breach of the partnership agreement.
5. The partners of the partnership can only be carried on at a loss – INSOLVENCY.
6. Any of the partners died.
SIR KM’S PARTNERSHIP & CORPORATION | PARTNERSHIP LIQUIDATION
CHAPTER FOUR
Partnership is LIQUIDATED when its business operations are completely terminated or ended. The partnership assets are
sold, the partnership creditors are paid, and the remaining assets, if any are distributed to the partners as a return of their
investments.
Partnership dissolution with liquidation may be caused by any of the following factors:
1.
2.
3.
4.
The accomplishment of the purpose for which the partnership was organized
The termination of the term/period covered by the partnership contract
The bankruptcy of the firm
The mutual agreement among the partners to close the business
Marshalling of Assets involves the order of creditor's rights against the partnership's assets and the personal assets of
the individual partners. The order in which claims against the partnership's assets will be marshalled is as follows:
1. Partnership creditors other than partners – Outside Creditors
2. Partner's claims other than capital and profits such as loans payable and accrued interest payable – Inside
Creditors
3. Partners claim to capital or profits, to the extent of credit balances in capital accounts – Owners’ Capital Balances
Right of Offset involves a deficit in a partner's capital (debit balance in the capital account of a partner) against the loan
payable to that partner. The loan payable to a partner has a higher priority in liquidation than a partner's capital balance but
a lower priority than liabilities to outside creditors.
1. Additional Investment = Solvent Partner (Assets > Liabilities)
2. Remaining Partners will Shoulder = Insolvent Partner (Assets < Liabilities)
METHODS OF LIQUIDATION
 Lump-Sum or Liquidation by Totals
 Partial or Instalment Liquidation
LUMP-SUM LIQUIDATION – is a process whereby the distribution of cash to the partners is done only after all the noncash assets have been realized. The total amount of gain or loss on realization is known, and all liabilities have been paid.
PROCEDURES
1. Sale of non-cash assets and distribution or allocation of gain or loss
2. Distribution of cash to creditors and partners
STATEMENT OF LIQUIDATION – is a statement prepared to summarize the liquidation process. It is the basis of the journal
entries made to record liquidation. This statement presents in working paper form the effect of the liquidation on the
Statement of Financial Position. It shows the conversion of assets into cash, the allocation of gain or loss on realization,
and the distribution of cash to creditors and partners.
EXAMPLE: AKO, SIYA O IKAW
AKO, SIYA O IKAW
Statement of Financial Position
OCTOBER 31, 2021
Assets
Cash
Other Assets
P74,000
360,000
TOTAL ASSETS
P434,000
Liabilities and Partner’s Equity
Liabilities
P125,000
Siya, Loan
13,900
Ako, Capital
116,800
Siya, Capital
81,900
Ikaw, Capital
96,400
TOTAL LIABILITIES AND PEQ
P434,000
SIR KM’S PARTNERSHIP & CORPORATION | PARTNERSHIP LIQUIDATION
Case 1: The other assets were sold for P269,000 – Loss on Realization
Case 2: The other assets were sold for P480,000 – Gain on Realization
Profit and Loss Ratio: 20%, 30%, 50%
CASE 1:
AKO, SIYA IKAW
STATEMENT OF LIQUIDATION
OCTOBER 31, 2021
Balances before
Liquidation
Sales of Assets
and Distribution of
Balances
Payment of
Liabilities
Balances
Payment to
Partners
Balances after
Liquidation
Cash
Other
Assets
Liabilities
Siya,
Loan
Ako,
Capital
(20%)
116,800
Siya,
Capital
(30%)
81,900
Ikaw,
Capital
(50%)
96,400
74,000
360,000
125,000
13,900
269,000
(360,000)
(18,200)
(27,300)
(45,500)
343,000
(138,900)
0
125,000
(125,000)
13,900
(13,900)
98,600
54,600
50,900
204,100
(204,100)
0
0
0
98,600
(98,600)
54,600
(54,600)
50,900
(50,900)
0
0
0
0
0
0
0
Ako,
Capital
(20%)
116,800
Siya,
Capital
(30%)
81,900
Ikaw,
Capital
(50%)
96,400
24,000
36,000
60,000
CASE 2:
AKO, SIYA IKAW
STATEMENT OF LIQUIDATION
OCTOBER 31, 2021
Balances before
Liquidation
Sales of Assets
and Distribution of
Balances
Payment of
Liabilities
Balances
Payment to
Partners
Balances after
Liquidation
Cash
Other
Assets
Liabilities
Siya,
Loan
74,000
360,000
125,000
13,900
480,000
(360,000)
554,000
(138,900)
0
125,000
(125,000)
13,900
(13,900)
140,800
117,900
156,400
415,100
(415,100)
0
0
0
140,800
(140,800)
117,900
(117,900)
156,400
(156,400)
0
0
0
0
0
0
0
SIR KM’S PARTNERSHIP & CORPORATION | CORPORATION
CHAPTER FIVE
According to Section 1 of the Corporation Code of the Philippines
CORPORATION 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.
According to RR 5-2021 under RA No. 11534 or the Corporate Recovery and Tax Incentives for Enterprise
Act (CREATE)
It defined CORPORATION as "shall include one person corporations, partnerships, no matter how created or
organized, joint stock companies, joint accounts, association, or insurance companies but does not include
general professional partnerships and joint ventures or consortiums formed for the purpose of undertaking
construction projects or engaging in petroleum, coal geothermal and other energy operations pursuant to an
operating consortium agreement under a service contract with the government.
CHARACTERISTICS OF A CORPORATION
1. Separate Legal Entity - Artificial Being – A Corporation is an artificial being with a personality that is separate
from that of its individual owners. Thus, it may, under its corporate name, take, hold, or convey property to the
extent allowed by law, enter into contracts and sue or be sued.
2. Created by Operation of Law – A Corporation is generally created by operation of law. The mere agreement of
the parties cannot give rise to a corporation.
3. Right of Succession – A Corporation has the right of succession, irrespective with the causes of dissolution; a
corporation can continue its existence up to the period of time stated in the articles of incorporation but not to exceed
fifty years.
4. Power, Attributes, Properties authorized by Law – Being a mere creation of law, a corporation can only exercise
powers provided by law and those powers which are incidental to its existence.
5. Ownership Divided into Shares – Shareholders have their respective shares in a corporation.
6. Board of Directors – Board of Directors elected by the shareholders. The board of directors is the governing body
or decision making body of the corporation. The Corporation Law provides that the number of directors be not less
than five but not more than fifteen.
ADVANTAGES OF A CORPORATION
1. Greater Amount of Capital – It is easy for a corporation to raise and assemble capital from the combined
investments of many shareholders.
2. Limited Liability – Creditors of a corporation have a claim against the assets of the corporation but not against the
personal property of its owners. A shareholder never loses beyond the amount of his investment.
3. Transferability of Shares of Stock – A shareholder can transfer and dispose shares of stock at will without the
consent of other shareholders or of the corporation itself.
4. Continuous Existence – The life of a corporation can be extended.
5. Legal Unit – The Corporation has a legal capacity to act as a legal unit.
6. Centralized Management – The management of a corporation is centralized in the board of directors.
7. Standard Creation – Creation, organization, management and dissolution of corporations are governed under one
general incorporation law.
SIR KM’S PARTNERSHIP & CORPORATION | CORPORATION
TYPES OF A CORPORATION
1. Public Corporations – Those formed for political or governmental purposes such as municipalities and cities.
2. Private Corporations – A corporation that is organized for private purposes (e.g Coca-Cola, San Miguel
Corporation.
3. Stock Corporations – A corporation in which the capital is divided into shares of stock and is authorized to
distribute corporate earnings to holders on the basis of shares held. The owners of stock corporations are called
shareholders.
4. Non-Stock Corporations – A corporation in which capital comes from fees paid by individuals composing it. The
owners of a non-stock corporation are called members
5. Quasi-Public Corporations – Those engaged in rendering public services such as bus, electric, water, and
telephone companies.
6. Government owned or Controlled Corporations – Those which are organized by the government or those in
which the government is a majority stockholder.
7. Domestic Corporations – Those corporations incorporated under Philippine Laws
8. Foreign Corporations – Those corporations formed, organized or existing under any laws other than those of the
Philippines.
9. Ecclesiastical Corporation – Is one which is organized for religious purposes.
10. Eleemosynary Corporation – Is one established for charitable purposes.
11. Open Corporation – Corporation whose ownership is widely held by many investors, usually private stock
corporation.
12. Close Corporation or Family Corporation – Is one, which is limited to selected individuals or members of the family.
CORPORATIVE INCOME TAX RATES UNDER RR 5-2021
Types of Corporation
Domestic Corporation
For corporations with net taxable
income not exceeding 5,000,000 and
Total
assets
not
exceeding
100,000,000, excluding the land on
which the particular business entity’s
office, plant and equipment are
situated
Resident Foreign Corporation
Non-Resident Foreign Corporation
Rate
25%
20%
Effectivity
July 1, 2020
July 1, 2020
25%
25%
July 1, 2020
Jan 1, 2020
COMPONENTS OF A CORPORATION
1. Incorporators – They are the persons who originally formed the corporation and whose names appear in the
Articles of Incorporation.
2. Corporators – They are the persons who compose the corporation whether as shareholders or members.
3. Shareholders – They are the corporators of a stock corporation.
4. Members – They are the corporators of a non-stock corporation
SIR KM’S PARTNERSHIP & CORPORATION | CORPORATION
CORPORATE STRUCTURE
SHAREHOLDERS
BOARD OR DIRECTORS
PRESIDENT (CEO)
VICE PRESIDENTS
The Corporators are the owners of the corporation. They are called Shareholders in a stock corporation. They have
ultimate control over the corporation and have a right to elect the board of directors. The corporators are called members
in a non- stock corporation and have a right to elect the board of trustees. The founders of a corporation are called
incorporators. And these are the original shareholders mentioned in the articles of incorporation.
The Board of Directors is responsible for the overall supervision of the firm. They have the final authority on policy making
and control of corporate activities. They evaluate management performance and act on legal matters as well.
The day to day operation of the corporation is delegated to the officers who are appointed by the Board of Directors. The
President (usually called the Chief Executive Officer (CEO) and other officers are responsible for implementing the
policies set up and the plans drawn by the board of directors.
Next to President are various officers called Vice-Presidents with specific areas of responsibility such as production,
finance, marketing, and human resources.
The election of the professional management team or the administrative officers is entrusted to the board. This team may
include the President, Executive Vice-President, Vice Presidents in charge of Sales, Manufacturing, Accounting,
Finance, Administration and other key areas: Secretary, Treasurer, Controller (Auditor). These officers implement the
policies of the board of directors and actively manage the day to day affairs of the corporation.
Annually, a corporation holds the shareholder's meeting during which the shareholders elect their directors and make other
decisions.
Section 25 of the Corporation Code of the Philippines, states that the President of a Corporation must be a director of the
Corporation, but he cannot act as a President and Secretary or as a President and Treasurer at the same time.
The Corporate Secretary must be a resident and a citizen of the Philippines. He need not be a Director unless required by
the Corporate by Laws.
The Corporate Treasurer is the proper officer entrusted with the authority to receive and keep the money of the corporation
and to disburse them as may be authorized
ORGANIZING A CORPORATION
The process of organizing a corporation generally consists of three stages:
1. Promotion – Includes the selection of a place where in the business is to be legally located, determination of capital
structure, choosing the methods of raising funds, drafting the constitution and bylaws etc.
2. Incorporation – The process of formalizing the organization of the corporation. This stage includes:
a.) Drafting of the articles of incorporation which must be duly executed and acknowledged before a notary
public.
b.) Filing of the articles of incorporation with the Securities and Exchange Commission (SEC) together with the
statement showing that at least 25% of the total authorized share capital (also known as authorized capital
stock) has been subscribed and that at least 25% of the total subscriptions have been paid.
c.) After the required fees have been paid and upon approval of the articles of incorporation, the SEC issues
a certificate of incorporation, the date of which being considered as the date of registration or incorporation.
3. Commencement of the Business – The business should start its operations within two years from the date of
incorporation. Failure to do so will automatically dissolve the corporation without the need for a hearing.
SIR KM’S PARTNERSHIP & CORPORATION | CORPORATION
ARTICLES OF INCORPORATION
The Articles of incorporation contains the rights and restrictions conferred by the government upon the corporation. The
following information is usually included in the articles of incorporation.
1.
2.
3.
4.
5.
The name of the corporation
The place of the principal of the corporation
The term of existence of the corporation not exceeding fifty years
The names, nationalities, and addresses of the incorporators
The names of the directors who will serve until their successors are duly elected and qualified in accordance with
the by laws
6. The authorized share capital (authorized capital stock), the classes of share capital (stocks) to be issued and the
number of shares in terms of each class indicating the par value per share, if there is any.
7. The amount of subscriptions to the share capital (capital stock), the names of the subscribers and the number of
shares subscribed by each
8. The total amount paid on the subscriptions to the share capital (capital stock) and the amount paid by each
subscriber on his subscription.
BY LAWS
The Corporate by Laws normally include the following:
1. The date, place and manner of calling the annual shareholders meeting
2. The manner of conducting meetings.
3. The circumstances which may permit the calling of special meetings of the shareholders
4. The manner of voting and the use of proxies
5. The manner of electing the directors and the number of directors
6. The term of office of the directors
7. The authority and duties of the directors
8. The manner of selecting the corporate officers
9. The authority and responsibilities of the officers
10. The procedure for amending the articles of incorporation
11. The procedure for amending the by laws
CLASSES OF SHARES IN GENERAL
1. Par Value Shares – On in which a specific amount is fixed in the articles on incorporation and appearing on the
certificates of stock
2. No Par Value Shares – One without any value appearing on the face of the certificate of stock. A no par value
share may have a stated value which may be fixed in the articles of incorporation
The Minimum Stated Value of a no par value is five pesos (P 5.00) per share
3. Voting Shares – Those issued with the right to vote
4. Non-Voting Shares – Those issued without the right to vote
5. Ordinary Shares – These shares entitle the holder to an equal pro rata division of profits without any preference
6. Preference Shares – These shares entitle the holder to certain advantages or benefits over the holders of ordinary
shares
7. Treasury Shares – A stock has been issued by the corporation as fully paid and later reacquired but not retired.
MINIMUM SUBSCRIPTION AND PAID IN CAPITAL
At the time of incorporation at least twenty five (25%) percent of the authorized capital stock (share capital) as stated in the
articles of incorporation must be subscribed and at least 25% of the total subscription must be paid upon subscription.
In no case, shall the paid in capital be less than five thousand pesos (P 5,000).
SIR KM’S PARTNERSHIP & CORPORATION | CORPORATION
These requirements are mandatory. The Securities and Exchange Commission shall not accept the articles of incorporation
of any stock corporation unless accompanied by a sworn statement of the Treasurer elected by the subscribers showing
that the minimum subscription and paid in capital requirements have been complied with.
ACCOUNTING FOR SHARES OF STOCKS
1. Authorization – recording of the maximum number of shares a corporation is authorized to issue as stated in the
articles of incorporation. This is called Authorized Share Capital or Authorized Capital Stock.
2. Sale – when a shareholder buys and pays immediately in full, the shares are considered sold and a stock certificate
is issued. The share are called Share Capital.
3. Subscription – a subscriber enters into a contract to buy a number of shares. A down payment is usually required
with the balance payable on a fixed date or upon call by the Board of Directors. The shares are called Subscribed
Share Capital.
4. Collection or Subscription – the subscription may be paid by the shareholders in cash, property, or in the form of
service (as in the case of a partnership which is incorporated).
5. Issuance of Certificate – once the subscription is collected in full, a certificate is issued.
6. Reacquisition of Shares – the issuing corporation may reacquire ( purchase or redeem) the shares of stock which
were originally issued with the intention of either reselling or retiring these shares in the near future. These are
called Treasury Shares.
SHAREHOLDER’S EQUITY
The following is the shareholder’s equity section of a Statement of Financial Position
Shareholder’s Equity
Share Capital
Preference Shares – P50 par, 1,000 authorized, issued and outstanding
Ordinary Shares – P5 par, 30,000 authorized, 20,000 shares issued and outstanding
Shares Premium – Ordinary
Retained Earnings
TOTAL SHAREHOLDER’S EQUITY
P 50,000
100,000
50,000
80,000
P 280,000
RETAINED EARNINGS
It represents the component of the shareholders equity arising from the retention of assets generated from profit- directed
activities of the corporation.
At the end of an accounting period, the income summary account of a corporation is closed to the Retained Earnings
Account.
The Retained Earnings account is credited with the corporation's profit or debited with the loss. The basic source of retained
earnings is profit.
Distribution to shareholders of cash, property or stocks from unrestricted retained earnings on the basis of all issued and
fully paid shares and all subscribed peer value shares except treasury shares are called. "Dividends".
Dividend declaration reduce retained earnings.
The declaration and payment of dividends involve three important dates:
DATE OF DECLARATION
On the date of declaration, the board of directors will adopt a resolution declaring that a dividends is to be paid.
SIR KM’S PARTNERSHIP & CORPORATION | CORPORATION
The resolution will specify the amount, type and date of payment of this dividend. It will also set a date of record.
Cash dividends are declared solely by the board of directors while Share Dividends will necessitate the concurrence of
at least 2/3 of the outstanding shareholders.
Declared dividends are obligations of the firm. Dividends to be paid in cash or property become a liability on this date.
An entry is made by
Debiting Retained Earnings XXX
Crediting Dividend Liability or shares distributable account XXX
Paragraph 10 of IFRIC 17 provides that the liability to pay a dividend shall be recognized when the dividend is appropriately
authorized and is no longer at the discretion of the entity, which is the date:
a.) When declaration of dividend by the management or board of directors is approved by the relevant authority e.g
shareholders, if the jurisdiction requires such approval
b.) When the dividend is declared e.g by management or the board of directors if the jurisdiction does not require
further approval
DATE OF RECORD
A list of shareholders entitled to the declared dividends is prepared at the date of record. If an investor buys a share of
stock after this date, he will not receive the dividend. The share is to be traded ex dividend. No entry is required on this
date.
DATE OF PAYMENT
The corporation settles its liability on this date. An entry is made by
Debiting the Dividend Liability or Shares Distributable Account
Crediting Cash, Property Distributed Share or Share Capital