Accounting for Corporations: Key Concepts

• Accounting for corporations involves conceptual frameworks and accounting standards, mainly BATHEOAX

Definition of a Corporation

• A corporation is an artificial being created by law.
• It possesses the right of succession.
• It has powers, attributes, and properties authorized by law and incident to its existence, as per the New Corporation Code

Attributes and Characteristics of a Corporation

• A corporation is an artificial entity with a distinct personality from its shareholders or members.
• Corporations are created by operation of law.
• They possess the right of succession.
• Corporations have powers and properties authorized by law.

Characteristics of Corporations

• Shareholders have limited liability.
• Corporations are closely regulated by the government.
• Corporations have delegated management structures.

Similarities Between a Partnership and a Corporation

• Both have a separate legal personality from their composing individuals.
• Both act through agents.
• Both are composed of an aggregate of individuals.

Distinction Between a Partnership and a Corporation

• Manner of Creation and Laws: Differ in formation processes and governing laws.
• Number of Incorporators: The required number of incorporators varies.
• Commencement of Juridical Personality: The point at which legal existence begins differs.
• Powers: The scope of powers granted to each entity differs.
• Management: How each entity is managed differs.
• Right of Succession: Only corporations possess this right.
• Transferability of Interest: Ease of transferring ownership interests differs.
• Term of Existence: Corporations can have perpetual existence, unlike partnerships.
• Dissolution: Procedures and reasons for dissolution differ.

Advantages of Corporations

• Continuous Existence: Corporations can outlive their owners.
• Centralized Management: Management is concentrated in a Board of Directors or Trustees.
• Limited Liability: Shareholders' liability is capped.
• Share Transfer: Shares can be transferred without needing consent from other shareholders.

Disadvantages of Corporations

• Complex Formation: Setting up a corporation can be complicated.
• High Costs: Formation and operations can be expensive.
• Weakened Credit: Limited liability can weaken the corporation's credit standing.
• Government Control: Corporations face greater regulatory oversight.
• Limited Voice: Shareholders or members may have little say in business operations.

Classes of Corporations

• Stock Corporation: Has share capital divided into shares; distributes dividends or surplus profits to shareholders.
• Non-Stock Corporation: No part of its income is distributable as dividends to members, trustees, or officers.

Other Classifications of Corporations

• Public Corporation: Formed or organized for the government of a portion of the state.
• Private Corporation: Created for private aims, benefits, or purposes.
• Ecclesiastical Corporation: Organized for religious purposes.
• Eleemosynary Corporation: Established for public charity.
• Civil Corporation: Established for business or profit.
• Domestic Corporation: Organized under Philippine laws.
• Foreign Corporation: Organized under foreign laws.
• Close Corporation: Share ownership is limited to selected persons or a family (not exceeding 20 members).
• Open Corporation: Shares are available for public subscription or purchase.
• Parent or Holding Corporation: Has the power to directly or indirectly elect the majority of directors of a subsidiary.
• Subsidiary Corporation: Controlled by another corporation known as a parent.
• De Jure Corporation: Exists in fact and law; organized in strict conformity with the law.
• De Facto Corporation: Exists in fact but not in law.

Powers of a Corporation

• Power to sue and be sued in its corporate name.
• Perpetual existence, unless specified otherwise in the certificate of incorporation.
• To use a corporate seal.
• Authority to amend its articles of incorporation.
• Ability to adopt, amend, or repeal by-laws.
• In stock corporations, power to issue and sell stocks.
• Right to purchase, receive, take, grant, hold, convey, sell, lease, and mortgage property.
• To enter into partnerships, joint ventures, mergers, or commercial agreements.
• Authority to make reasonable donations for public welfare, charitable, cultural, scientific, or civic purposes; foreign corporations cannot donate to political parties.
• To establish pension, retirement, and other benefit plans for its personnel.
• To exercise powers essential or necessary to carry out its purpose.

Components of a Corporation

• Incorporator: Original corporators forming the corporation, appearing in the Articles of Incorporation (AOI).
• Corporators: Persons who compose the corporation, whether as stockholders/shareholders or members.
• Shareholders: Owners of shares in a stock corporation.
• Members: Owners in a non-stock corporation.
• Subscribers: Those who agreed to buy shares but will pay later.
• Promoter: A person who takes initiative in founding and organizing the corporation.
• Underwriters: Investment bankers who agree to buy securities or guarantee their sale.
• Independent Director: A non-employee director providing leadership, strategy, and governance.

Distinction Between Corporators and Incorporators

• Corporators: Not necessarily signatories of the Articles of Incorporation; cease to be corporators when no longer shareholders.
• Incorporators: Originally formed and signed the Articles of Incorporation; remain as such even without shares.

Qualifications for Incorporators

• Must be natural persons of legal age.
• A majority must be residents of the Philippines.
• Must own or subscribe to at least one share of capital stock.

Qualifications for Directors

• Owner of at least one share.
• Majority must reside in the Philippines.
• Must not have been convicted of an offense punishable by imprisonment of more than 6 years.
• Must not violate the corporation code within 5 years prior to election or appointment

Qualifications for Corporate Officers

• President must be a director.
• Secretary must reside in the Philippines and be a citizen.
• Treasurer may or may not be a director.
• Not convicted by final judgment for an offense with imprisonment of more than 6 years.
• No violation of the corporation code within 5 years prior to the election or appointment.

Rights of Shareholders

• Right to a stock certificate as evidence of share ownership and to transfer shares.
• Right to vote via remote communication or in absentia at shareholder meetings.
• Right to elect and remove directors.
• Right to adopt, amend, or repeal the by-laws.
• Pre-emptive right to purchase new shares to maintain ownership percentage.
• Right to receive declared dividends.
• Right to inspect corporate books and records and receive financial reports.
• Right to asset distribution upon dissolution

Minimum Capital Stock

• Old Code: 25% of authorized capital stock must be subscribed, with 25% of the total subscription paid.
• New Code: No minimum capital stock required unless specified by law.

Perpetual Existence

• Old Corporation Code: Limited to a period not exceeding 50 years.
• Revised Corporation Code: Default rule is perpetual existence, unless stated otherwise.

Steps in the Creation of a Corporation

• Promotion: Bringing together interested parties and soliciting subscriptions.
• Incorporation: Includes choosing a name, drafting and executing articles, SEC filing, paying fees, and SEC issuance of the certificate
• Formal Organization and Business Operations: The juridical personality comes to life once the SEC issues a certificate of incorporation.

Articles of Incorporation Contents

• Corporation name.
• Specific purpose for which the corporation is being formed.
• Location of the principal office (must be in the Philippines).
• Term of corporate existence (if not perpetual).
• Names, nationalities, and residences of the incorporators.
• Number of directors or trustees.
• Stock corporation details: Amount of authorized capital stock and subscriptions.
• Non-stock: Amount of capital, contributors, and amount contributed.
• Other matters consistent with the law

By-Laws

• Defined as rules of action adopted for internal governance and the governance of officers, shareholders, or members
• By-laws supplement the Articles of Incorporation
• Include rules for internal governance

By-Laws Matters to Include

• Meeting schedules for directors, trustees, shareholders, and members.
• Procedures for quorum and voting.
• The form of proxies.
• Director and trustee: qualifications, duties, and compensation guidelines.
• Annual election procedures.
• Penalties for by-law violations.
• Issuance of stock certificates (stock corporation).
• Other governance and anti-corruption measures.

Books and Records Corporations Must Keep

• Minutes book: Records of meetings.
• Stock and transfer book: Shareholder details, payments, and transfers.
• Subscription book: Contains blank subscription forms.
• Shareholders' ledger: Records shares issued per shareholder.
• Subscribers' ledger: Details individual subscriptions.
• Stock certificate book: Contains blank stock certificates.
• Book of accounts: Records business transactions, like journals and ledgers.

Grounds for Revocation of License

• Failing to file annual reports.
• Failure to appoint/maintain a resident agent in the Philippines.
• Failure to notify the SEC of any changes to a resident agent or address.
• Failure to submit any amendments to the articles, by-laws, or other merger documents to the SEC.
• Misrepresentation in submitted documents.
• Failure to pay taxes or penalties.
• Conducting unauthorized business transactions.
• Acting on behalf of an unlicensed foreign corporation.
• Any other grounds that determine unsuitability to conduct business.

Shareholders' Equity

• It is the residual interest of the owners in a corporation
• Also known as Owner's Equity or Net Assets.

Shareholders' Equity Components

• Share capital (contributed or paid-in capital)
• Retained earnings.

Classes of Share Capital

• Ordinary Share (Common stock): Represents the basic ownership class; has the right to vote and share pro-rata.
• Preference Share (Preferred Stock): Advantages over ordinary shares.
• Par Value Shares: Fixed amount in the articles of incorporation and on the stock certificate.
• No-Par Value Shares: No value appearing on the face of the stock certificate, but a stated value may be fixed.
• Voting Shares: Shares issued with the right to vote.
• Non-Voting shares: Shares without the right to vote
• Founder's Shares: May be given certain rights and privileges not enjoyed by other stocks.
• Redeemable Shares: May be purchased by the corporation after a fixed period.
• Treasury Shares: Issued shares reacquired but not retired.
• Promotion Shares: Issued as compensation for promoting the corporation.
• Convertible Shares: Convertible or changeable from one class to another

Elements of Shareholders' Equity

• Capital stock or share capital.
• Subscribed capital stock or subscribed share capital.
• Additional paid in capital or share premium.
• Retained earnings or accumulated earnings.
• Revaluation increment or revaluation surplus.
• Treasury stock or treasury shares.

Components of Shareholders' Equity

• Share Capital (Capital Stock): Paid-in capital representing the total par or stated value of the shares issued.

Share Capital Terms

• Authorized Share Capital
• Subscribed Share Capital
• Share Premium
• Accumulated Profits
• Treasury Share
• Revaluation Reserve

Methods of Accounting for Stock Transactions

• Under the memorandum entry method, there isn't a journal entry done when the authorization happens, rather, there is an indication simply stating what the shares are
• Under the journal entry method, a formal journal entry is done in the general journal to capture the authorized share capital

Journal Entries for Capital Stock

• To record the authorization of capital stock the Journal Entry must be done, only applicable to shares with a stated worth

The Subscription of Shares

• Shares may be sold directly to investors on a subscription basis
• Subscription contract outlines shares, price, terms
• Subscriber becomes a shareholder on subscription, but stock certificate are only available after the subscription is completed
• The corporation sells shares directly to investors through subscriptions.
• The subscription contract outlines the number of shares, subscription price, terms of payment, and conditions.
• Subscribers become shareholders upon subscription, but stock certificates are issued only after full payment.

Treasury Stocks

• These are shares issued and fully paid for, and later acquired by the issuing corporation
• Treasury Stock is not an asset, rather a deduction from equity
• Include supporting employee stock plans, adjusting stock market capital preventing takeovers
• Reasons include supporting employee stock purchase plans, adjusting market capital, or preventing takeovers.

Accounting for Cash and Cash Equivalents

• Aims to define cash, identify the items that are included within the lines for Cash and cash equivalents, and accounting for petty cash funds as well as either overages or shortages

Definition of Cash

• Includes funds or their counterpart which is available to use
• Cash includes cash equivalents on hand and in the bank

Cash on Hand vs Cash in Bank

• Cash on Hand: Refers to current undisposed collections and money held on a specific date.
• Cash in Bank - unrestricted: Refers to funds available in banks that unrestricted and available for immediate use.

Examples of Cash

• Coins and currencies.
• Demand deposits and savings accounts.
• Checks, bank drafts, and money orders.
• Cash funds set aside for current obligations

Postdated Checks

• Postdated checks are cash receipts
• Adjustments for postdated checks are only made when financial statements are being prepared.
• Adjusting entry is required in order to revert the postdated checks to accounts receivable

Checks Encashed

• No separate accounting is needed for checks that were initially received as postdated but were marked as due prior to the preparation of financial statements.

Unused Line of Credit

• Unused revolving line of credit should not be included in the financial statements. Rather, the information regarding them can be found within the notes section. Unused revolving line of credit refers to the difference between the amount of credit and the amount that was actually used.

Unreleased and Postdated Checks

• Payment has not been made if checks drawn are not (a) given to the payee or (b) are postdated

Adjustments for Unreleased Checks

• An adjustment entry is need to revert unreleased checks or postdated checks to cash

Stale Checks

• These are the checks payee has not cashed withing a long time period of normally 6 months. Stale checks go back to cash.

Cash Equivalents

• Short-term, highly liquid investments with insignificant changes in value
• Only debt instruments acquired within 3 months before maturity can qualify as cash equivalents.

Treasury Bills

• Notes or bonds acquired 3 months prior to maturity Commercial paper or money market instruments

Treasury Bills vs Treasury Notes and Bonds

• There are short-term obligations government issues at a reduced rate, Notes and bonds however, are longer-commitments. These treasury bills must be paid within a year

Money Market Instruments

• Money market tools are investment in short-term securities
• Ex: Large companies issue short-term, secured, bills in large denominations A commercial paper acquired 3 months or before it's date may qualify as cash equivalen

Time Deposits

• Exists as the the form of a deposit in a bank and bears higher interest than the deposits normally made, Has a pre-agreed date. There must be a deposit certificate

Financial Statement Presentation

• Report your unrestricted equivalents and your unrestricted cash together in a single line within the statements of financial position titled "Cash and cash equivalents", Notes should contain a breakdown of this

Cash Measurement

• Cash is measured at face amount (Face Value).
• Translate cash in foreign currency at the current exchange rate at reporting date.

Cash on Hand

• Cash being maintained during bankruptcy must be excluded from deposit
• The money is presented as an investment at realizable value

Deposit in Foreign Banks

• These must be included as cash when available to draw at face value
• This must be translated in correspondence with the current exchange rates as of the reporting date

Overdraft Details

• The money has run out due to overpayment, which results a negative amount
• Since this money is a result of overpayment, it is seen as current debt

Bank Accounts

• When an account is negative while another is positive and maintained in the same bank, that overdraft can be offset against the positive balance if unrestricted

Internal Controls over Cash

• Segregation of incompatible duties
• Imprest system
• Bank reconciliation
• Cash counts
• Maintain balance
• Ensure fast deposit
• Prevent staff from using petty cash
• All transactions properly recorded and verified

Cash Shortages and Overages

• It there isn't enough cash, Cash Shortage debit is used, it remains this way pending an investigation. An adjusting entry is needed to see this account as being paid. Depending on the source depends on the account you reconcile with
• Overage: If there is too much cash, Cash overage is used and is credited pending investigation as well

Concealment of Cash Shortages

• Lapping which is when a certain amount of accounts that has an incorrect total and is then fixed after applying a amount from another customer. Results of uncompatible duties.
• Kiting which is when shortage is hidden by showing extra cash, Results of exploiting Bank

Petty Cash Fund

• Petty Cash refers to the system that enforces that all receipts go to deposit and every disbursement must be done and verified through checks. Petty funds exist in order set aside funds for smaller purchases.

Bank Reconciliation Statement Purpose

• Prepared so that cash at records and bank balance is in agreement
• This method is used in order to arrive at the correct amount needed for the statement, by showing a report
• The bank provides a report monthly which shows the withdrawals in the account, and the running total of the deposit’s bank account.
• Provides information for journal entries
• The goal is to provide journal entries, explaining the differences in cash balance between accounting records and statements

Bank Reconciliation Statement Explanation

• This is made monthly after receiving the bank statement
• It needs to be reconciled as soon as statement is received
• Bank makes a financial which shows withdrawals and deposits with a running deposit cumulative balance

Reconciling Methods

• Book end balance = Account in the statement
• Bank Balance = Ending balance shown in bank
• Credit memos are credited with the bank
• Debits is how bank debits by making reductions
• Book Errors, are errors done done by investor

Deposit in Transit

• Deposit in Transit = Deposits, but aren't credited by the bank
• Checks that exist but have not been cashed
• Bank errors

Accounts Receivable

• To have a clear understanding of determining how to measure the value of accounts recievable

AR Acquired

• Assets which signify an amount from another entity , in correspondence with contractual law.
• AR Ex: Notes and accounts Receivables, Loans, Advances, Accrued Income, Deposits, Claims

AR: Nontrade vs Trade

• Trade : Claims done due to services
• Nontrade : All other sources of receivables

AR Classification

• Amounts expected to be cashed out on either the next operating cycle, or one a year, is considered to be current assets
• To remain current assets, the non trade accounts must be collected in a year

Initial Measurement

• Done by accounts recievable must be initially done at face value, while including the prices to be directly acquired
• In case of doubt, the accounts should be measured in correspondants with price of transaction.

Conditions to AR

• Receivables may be only be added when there a right to consideration

AR Treatment

• Shipping policy is when the goods are sold and transferred , on a recognized day. If destination is in good condition, sale is authorized when products arrive.
• Freight charges are shipped under both conditions when both seller and buyer recognize receipt.

Discounts

• Trade, allows for people with high order quantity or fixed prices when the true price is lower than the cost.
• Cash, are a form of prompt payments.

AR measurements

• After initial measure, AR value is to change after determining whether to take note of its receivable value

Bad Debt AR

• This may occur as there is a chance people cant pay them or even that you may take them at face value
• This is when there would be a bad debt occurance

The aging process

• As this occurs, the receivables accounts are assessed on whether it is past or not

AR: When Aging

• Due, but past date
• 1-30 past
• 31-60
• 61-90
• 91-120
• 121-180

AR: Past 180

• 180 and to 365
• Finally > 1 on the year

Measuring Allowance

• To calculate this multiply each category against the rate to find loss

Methods of Estimating Doubtful Accounts

• Aging of AR or Statement of Financial Position (SFP) approach
• Percent of AR or SFP approach.
• Percent of Sales or Income Statement Approach.

Accounts Receivable Aging Classification

• Classify by due or past due categories.
• Consider the date for not-due and overdue time periods.

AR: Balance

• An AR requires that expenses come at the same time as the statements
• This can be classified by a %

Allowance AR

• This follows what the state sets that the payments

Notes Receivable

• The material supported by these comes with promises to repay the notes later.

Negotiable NN Details

• Made by one, and addressed to another that promises a number of things on demand or within a fixed time
• These promises should be with certainty

Dishonnor of Notes

• If you were to dishonnor promissary notes in AR you must remove them. At the same time, if you were to do so you must debit cash and follow normal steps in accounts receivable
• Amount to the AR should be what the AR is to be after counting charges and interest

Types of Receiving

• Year-long or short term. May or may not come with interest.

Valuing

• The value varies with the transactions
• This typically the face amount
• However, the value could be lower than the present day value if the transaction in question has siginificant financing

Discount Rate

• When there interest rates that not reasonable, or below market the value is discounted
• Money now is more than money later, and a calculation with interest to give relationships between time vs value.

Simple vs Compound

• What compounds adds to the same amount after interest vs what compounds adds to the base total
• Time is crucial in value of value.

Measurements of N/R After

• Value of this is typically what to gain if said money was to be gained back vs amortized back
• Depending on intial costs the money can be amortized back to its recoverable price

Timeline for Notes Receivable

• Def = Legal Doc to pay
• Doc, allows promises set out an amount at some time
• If dishonored transfer from notes receivable to accounts receivable
• Depending on circumstance it depends on payments for periods, also varies interest rates

Concepts for Time Value of Money

• Relates amount and value, involving interest calculations.