Accounting for Corporations - Share Capital

Balance Sheet Structure in Different Business Entities

  • Sole Proprietorship

    • Equation: Assets = Liabilities + Owner's Equity

    • Capital is encapsulated in Owner's Equity.

  • Partnership

    • Equation: Assets = Liabilities + Partners' Capital

    • Similar structure to sole proprietorship, with capital divided among partners.

  • Corporation

    • Equation: Assets = Liabilities + Shareholders' Equity

    • Owner's equity in corporations is referred to as shareholders' equity, further divided into share capital and retained earnings.

Components of Shareholders' Equity

  • Share Capital

    • Represents resources collected from shareholders through investments.

    • Can include issuer donations and other transactions.

    • Reflects financial backing through share issuance.

  • Retained Earnings

    • Accumulated profits or losses retained for business operations rather than distributed as dividends.

    • Influenced by the corporation's profitability.

Types of Share Capital Terms

  • Authorized Share Capital

    • Maximum number of shares a corporation can issue; calculated by multiplying the maximum number of shares by their par value.

  • Issued Share Capital

    • Represents shares sold and fully paid for by investors.

  • Subscribed Share Capital

    • Portion of authorized capital subscribed for but not fully paid.

  • Unsubscribed Capital

    • Refers to shares that have yet to be subscribed.

  • Outstanding Share Capital

    • Issued shares currently held by shareholders; calculated by subtracting treasury shares from issued shares.

    • Treasury Shares: Issued shares repurchased by the corporation not counted as outstanding.

Types of Shares

  • Ordinary Shares

    • Fundamental class of ownership in a corporation; if only one class is issued, it is ordinary shares.

  • Preference Shares

    • Provides preferential rights over ordinary shares, such as preferred dividends and asset claims during liquidation.

Accounting for Issuance of Share Capital

  • Shares with Par Value

    • Journal entry credits the share capital account at par value; excess goes into a share premium account.

  • Shares without Par Value

    • Proceeds from issuance credited directly to the share capital account.

    • If there's a stated value, excess proceeds over this value could be credited to the share premium account.

Journal Entry Examples

  • Example 1

    • Authorization: 100,000 ordinary shares with a par value of 100 pesos;

    • Sale of 1,000 shares for 100,000 pesos:

      • Debit Cash Account

      • Credit Share Capital Account (par value)

  • Example 2

    • Sale of 5,000 shares for 630,000 pesos:

      • Debit Cash Account

      • Credit Ordinary Share Capital (par value)

      • Credit Share Premium Account (excess amount)

Conclusion

  • Grasping the structure of share capital and proper accounting for its issuance is crucial for effective financial management in corporations.