Accounting for Corporation

An overview:
This is to introduce the Revised Corporation Code of 2019 which was enacted by the 17 th
Congress and signed into law by His Excellency President Rodrigo Roa Duterte on February 20, 2019 and
to take effect on February 23, 2019.

A corporation is not in reality a natural person but the law treats it as if it was because like a
person, it can acquire and sell its own properties, enter into contract, incur liabilities, can sue and can be
sued to court as an individual entity separate and distinct from the owners.

A corporation is the biggest and most complicated form of business organization because so
many reportorial requirements. It is formed by any person, partnership, association or corporation,
singly or jointly with others but not more than fifteen (15) in number.

The first to organize the corporation and originally signed the Articles of Incorporation are
called “Incorporators”. Incorporators must be natural persons (not artificial). Unlike, in a partnership
where it is formed by a mere contract between partners, a corporation exists because of the operation
of law.

Incorporators vs. corporator: “Not all corporators are incorporators, then, all incorporators are
corporators.”

Its capital is called “Share Capital’ which is divided into units called “shares” and each share has
a designated value called “Par Value”. Owners of shares are called “Shareholders”. There is no limit as
to the number of shareholders in a corporation.

The accumulated profit/loss) of a corporation was previously termed as “Retained Earnings” but
is presently called “Accumulated Profit/Loss)”, which are distributed to shareholders in a form of
dividends” as their respective share in corporation’s profit.

Stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid
in capital stock with exception as contained in Section 42 of the Revised Corporation Code.

The powers of the corporation are vested upon by a governing body called “Board of Directors”
who formulate its policies and the “President” executes the said policies.

A shareholder may sell his share to anybody or even to a juridical entity without the consent of
other shareholders.

The corporation under the 2019 Revised Corporation Code shall have perpetual existence,
unless the Articles of Incorporation provides otherwise. It enjoys unlimited life. However, the
corporation through its Articles of Incorporation may limit the years of existence.

A One Person Corporation is a corporation with a single stockholder: Provided, that only natural
person, trust, or an estate may form a corporation. Like an ordinary corporation, there is no
requirement as to minimum capital stock. A single stockholder shall designate a nominee or alternate
nominee who shall, in the event of single stockholder’s death or incapacity, take the place of a single
stockholder as director and shall manage the corporation’s affairs.

Definition:

Republic Act No. 11232 known as the Revised Corporation Code of 2019 defines corporation as:
“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”.

Characteristics of a Corporation
1). Separate Legal Entity
2). Transferable Unit of Ownership
3). Limited Liability of Shareholders
4). Continuity of Existence or unlimited life
5). Governing Body

Distinction Between Partnership and Corporation

Partnership Corporation
Created be mere agreement of parties. Created by operation of law.
Requires at least two persons to form a Requires not more than fifteen in number.
partnership.
Begins to acquire juridical personality Begins to have a corporate existence and
from the moment the partners have juridical personality at the time the certificate
executed the contract. of incorporation is issued by SEC.
May exercise any power authorized Can exercise only the powers expressly
by the partners provided it is not authorized by law o incident to its existence.
contrary to law, morals and public
order.
Creditors can run after the personal Creditors cannot run after the personal assets
assets of a general partner (except of a shareholder in case of liquidation.
limited partner) in case of liquidation.
An interest of a partner cannot be A share can be transferred without the
transferred without the consent of consent of other shareholders.
other partners.
It may be dissolved at any time by It can only be dissolved with the consent of
the will of any or all of the partners. the state.

Advantages of Corporation
1. Greater source of capital because there can be as many shareholders as there are authorized
shares to be used.
2. Shareholders are not liable to corporate obligations in excess of their contribution. This is
however, a disadvantage on the part of the creditors.
 3. Death of any of the shareholders will not dissolve the corporation because of the transferability
of shares.
4. The created governing body is composed of “top calibered” shareholders who direct the
corporate affairs. More success can be attained.

Disadvantages of a Corporation
1. It is not easy to organize because of complicated legal requirements.
2. A limited credit line may be extended by creditors to a corporation because creditors cannot run
after the personal assets of the shareholders in case a corporation cannot pay its obligation.
3. Since management of a corporation is vested on Board of Directors who may happen to be the
majority shareholders, abuse of powers is possible.
4. Subject to strict governmental control.

Classification of Corporation

1). As to purpose:
a). Public corporation
b). Private Corporation
c). Quasi-Public Corporation

2). As to Law of Creation

a). Domestic Corporation
b). Foreign Corporation

3). As to Membership Holdings

a). Stock Corporation
b). Non-Stock Corporation

4). As to Admission of Shareholders

a). Open Corporation
b). Closely-Held Corporation

5). As to Other Purpose

a). Ecclesiastical Corporation
b). Lay Corporation

Components of a Corporation
1). Corporators
2). Incorporators
3). Shareholders
4). Members
5). Promoters
6). Board of Directors
7). Subscribers
Who may form a corporation?
Any person, partnership, association or corporation, singly or jointly with others, but not more
than fifteen (15) in number may organize a corporation for any lawful purpose or purposes. Provided,
That natural persons who are licensed to practice a profession, and partnership or associations
organized for the purpose of practicing a profession shall not be allowed to organize as a corporation
unless otherwise provided under special laws. Incorporators who are natural persons must be of legal
age.
Each incorporator of a stock corporation must own or be a subscriber to at least one (1) share
capital stock.

How to Form a Corporation?

The formation of a corporation usually constitutes three (3) basic stages:

1). Organization Stage

2). Incorporation Stage

3). Commencement Stage

MINIMUM CAPITAL STOCK NOT REQUIRED OF STOCK CORPORATION

Section 12 of Revised Corporation Code states that “Stock Corporation” shall not be required to
have a minimum capital stock except as otherwise specifically provided by special law. This means that
the requirement of 25% of authorized capital stock must be subscribed and 25% of the subscribed
capital stock must be paid -up is no longer in effect.

Corporate Name
The Securities and Exchange Commission has adopted some guidelines to safeguard public
interest and to avoid conflict as to the corporate names as follows:
1. The proposed corporate name should not be identical with or similar to one already registered
with SEC;
2. The name of the corporation must have its suffix, the word “INC” for “Incorporated” unless it
includes the word “Corporation” as part of its name. The word “Company” “limited liability” or
an abbreviation of one of such word, and:
3. Punctuations, articles, conjunctions, contractions, prepositions, abbreviations, different tenses,
spacing, or number of the same word or phrase.

The penalties for the unauthorized use of corporate name shall be a fine ranging from Ten Thousand
Pesos (P10,000) to Two Hundred Thousand (P200,000).

Corporate Term
 Section 11 of the Revised Corporation Code states that a “Corporation shall have perpetual
existence unless its Article of incorporation provides otherwise’. This means that a corporation has an
unending life of existence

Effects of Non-Use of Corporate Charter

If a corporation does not formally organize and commence its business within five years from
the date of its incorporation, its certificate of incorporation shall be deemed revoke as of the day
following the end for the five year period.
However, if a corporation has commenced its business but subsequently becomes inoperative
for a period of at least five (5) consecutive years, the Commission may after due notice and hearing,
place the corporation under delinquent status. A delinquent corporation shall have a period of two
years to resume operations and comply with all the requirements that the commission shall prescribe.

Amendments of the Articles of Incorporation

Articles of Incorporation may be amended by a majority vote of the Board of Directors of
Trustees and the vote or written assent of the stockholders representing at least two-third (2/3) of the
outstanding capital stock.

By-Laws
By-laws refer to the “rules and regulations adopted by the corporation administering its internal
government”. By laws are provided for by Section 46 of the Corporation Code includes among others the
following:
1. Time, place and manner of calling and conduction regular and special meetings of directors or
trustees and of shareholders and members.
2. The manner of voting and use of proxies.
3. The manner of electing the Board of Directors
4. Qualifications, duties and compensation of directors or trustees, officers and employees.
5. Procedure of amending Articles of Incorporation and By-Laws, etc.

Corporate Records
1. Minutes Book
2. Stock and Transfer Book
a. Subscriber’s Ledger
b. Shareholder’s Journal
c. Shareholder’s Ledger
3. Subscription Book
4. Stock Certificate Book

Rights of Shareholders
The owners of share in a corporation are called ‘Shareholders”. Some of the basic rights of Shareholders
are as follows:
1. To attend and vote in person or by proxy in shareholder’s meeting.
2. To share its distribution of corporate profits (dividends out of earnings).
3. To share in distribution of assets upon corporate liquidation (liquidating dividends)
4. To inspect corporate books and records and to receive a copy of the financial report.
5. To purchase additional shares in the event the corporation issues additional share capital. This
is to maintain the percentage ownership of the shareholders. The right of a shareholder to be
given priority to acquire additional shares is called “Pre-emptive Right”.

The person who is given the authority by an incorporator/stockholder to attend meetings on his behalf
is called proxy.

Organization Costs
Organization cost are expenditures incurred while in the process of organizing a corporation.
This include expenses during promoter’s meeting with other prospective incorporators, attorney’s fees,
filing and publication fee, cost of printing, stock certificate, stock and transfer book, corporate seal,
accounting and legal fees related to stock issuances before the start of corporate operations. Under
Philippine Accounting Standards (PAS) No. 38, on Intangible Assets, organization costs or pre-operating
costs are charged to expense in the period incurred.

Stock Certificate
Ownership in a stock corporation is represented by its share capital which is divided into units
called “shares”. A shareholder’s ownership in the corporation is determined by the number of shares he
owns. So as, if an individual shareholder owns 200 shares of the corporation’s 1,000 shares outstanding,
he has 1/5 interest in that corporation. His ownership is evidenced by a document called “Share
Certificate”. This certificate can only be issued to the individual shareholders who have fully paid his
subscription.

Legal capital of a Corporation

Legal capital of a corporation is that portion of the paid-in capital arising from issuance of share
capital which must remain untouched and unimpaired in protection to corporate creditors and cannot
be returned to shareholders in any form during the lifetime of the corporation, except when a
liquidation happens and only after the debts have been paid. In case of a par value shares, legal capital
is the aggregate par value shares of all issued and subscribed shares. In case of no par value share, it is
the total consideration received by its corporation for the issuance or its share to the shareholders
including the excess of issue price over the stated value.

Trust Fund Doctrine

The “trust fund doctrine” is a legal principle that prohibits a private corporation to distribute its
legal capital to the shareholders for the protection of corporate creditors during the lifetime of a
corporation. However, a corporation can declare and pay dividends to the shareholders out of its “free”
or “unappropriated accumulated profits (losses)”.
Shareholders’ Equity
Shareholders’ Equity defined as “residual interest of the owners in the assets of the corporation
as a business entity, measured by the excess of assets over liabilities.

Shareholders’ Equity = Total Assets Minus Total Liabilities

Components of Shareholders’ Equity

The following are the components of the shareholders’ equity:
1. Share Capital
2. Subscribed Share Capital
3. Share Premium or Additional Paid in
4. Revaluation Surplus or Reserve
5. Accumulated Profits or Losses or Retained Earnings
6. Treasury Shares

Computation of Accumulated Profits( Losses) are computed as follows:

Accumulated profits(losses), Beginning xxx

Add(deduct): Prior Periods Adjustments:
Fundamental Errors xxx
Effect of Change in Accounting Policy xxx xxx
Accumulated profits(losses) as restated xxx
Add(deduct): profit (Loss) for the period xxx
Total xxx
Less: Dividends declared xxx
Accumulated profits (losses), Ending xxx
The Stockholders’ Equity may be presented on the following pro-forma as follows:

Stockholders’ Equity

Contributed Capital:
Share Capital xxx
Subscribed Share Capital xxx
Less: Subscription receivable xxx xxx xxx
Reserves:
Share premium in Excess of Par Value xxx
Share premium From Treasury share xxx
Appropriated Accumulated Profits (losses)
for Treasury Share xxx
Revaluation Increment in Property xxx xxx
Accumulated Profits(Losses) (Unrestricted) xxx
Total xxx
Less: Treasury shares at Cost xxx
Total Shareholders’ Equity xxx