Corporations are legal entities that allow for ownership shares to be traded publicly. They have a separate legal existence from owners and can raise large amounts of capital through stock sales. Ownership is represented by shares of stock. Corporations are controlled by shareholders who elect a board of directors to oversee management. They provide advantages like limited liability but are also subject to double taxation.

1. Accounting
STOCKS

2. Corporations
Most large business are organized as corporations.
In contrast, most small businesses are organized as proprietorships,
partnerships, or limited liability companies.

3. Characteristics of a Corporation
A corporation is a legal entity, distinct and separate from the individuals who
create and operate it.
As a legal entity, a corporation may acquire, own, and dispose of property in its
own name.
It may also incur liabilities and enter into contracts.
Most importantly, it can sell shares of ownership, called stock.
This characteristic gives corporations the ability to raise large amounts of capital.

4. Stockholders
The stockholders or shareholders who own the stock own the corporation.
They can buy and sell stock without affecting the corporation’s operations and
continued existence.
Corporations whose shares of stock are traded in public markets (stock
exchanges) are called public corporations.
Corporations whose stocks are not traded publically are usually owned by a
small group of investors and are called non-public of private corporations.
The stockholders of a corporation have limited liability. This means that creditors
usually may not go beyond the assets of the corporation to satisfy their claims.
Thus the financial loss is limited to the amount invested.

5. Organization Structure of a Corporation
The stockholders control a corporation by electing board of directors.
This board meets periodically and selects CEO and other major officers to manage the
corporation’s day to day affairs.
As a separate entity, a corporation is subject to taxes.
The income of the corporation that is distributed to share holders as dividend has already been
taxed. On the other hand, stockholders should also pay taxes on the dividends they receive.
This is a major disadvantage of corporations.
Stockholders
Board of
Directors
CXOs Officers Employees

6. Advantages and Disadvantages of
Corporations
Advantages Disadvantages
Separate legal existence
Owner is separate from management
Continuous life
Double taxation on dividends
Raising large amount of capital
Ownership rights are easily
transferable
Regulatory costs
Limited liability

7. Stockholders’ Equity
The owner’s equity in a corporation is called stockholders’ equity, share holders’ investment or
capital.
In the balance sheet, stock holders’ equity is reported by its two main components.
◦ Capital contributed to the corporation by the stockholders, called paid-in-capital or
contributed capital.
◦ Net income retained in the business is called retained earnings.
A stockholders’ equity section of a balance sheet is as follows:
Stockholders’ Equity
Paid-in capital
Common stock $330,000
Retained earnings 80,000
Total stock holders equity $410,000

8. Stockholders’ Equity
Paid-in capital contributed by stockholders is recorded in separate accounts for
each class of accounts.
If there is one class of stock, the account is entitled as common stock or capital
stock.
Retained earning is a corporation’s cumulative net income that has not been
distributed as dividend.
Dividends are distributions of a corporation’s earnings to stockholders.
Retained earnings that are not distributed as dividend is some times referred to
in the financial statements as earnings retained for use in business and earnings
reinvested in the business.

9. Stockholders’ Equity
Net income increases retained earning while a net loss or dividends decrease retained
earnings.
The net increase or decrease in retained earnings for a period is recorded by following
closing entries.
The balance of income summary is transferred to retained earnings. For net income,
income summary is debited and retained earnings is credited. For net loss, income
summary is credited and retained earnings is debited.
The balance of the dividends account, is transferred to retained earnings. Retained
earnings is debited and dividends is credited for the balance of the dividends account.
Retained earnings normally has credit balance. However in some cases it may have
debit balance, which is called deficit. Such a balance result from accumulated losses.
In the stockholders’ equity section, a deficit is deducted from paid-in capital to
determine total stockholders’ equity.

10. Paid-In Capital from Issuing Stock
Characteristics of Stock
The number of stocks that a corporation is authorized to issue is stated in its charter.
A corporation may reacquire some of the stocks that it has issued. The remaining
stocks in then called outstanding stocks.
Corporations have limited liability and, thus, creditors have no claim against
stockholders’ personal assets.
To protect creditors, however, corporations are required to maintain a minimum
amount of paid-in capital.
Major Rights of Shareholders’
◦ The right to vote in matters concerning the corporation.
◦ The right to share in distributions of earnings.
◦ The right to share in assets on liquidation.

11. Classes of Stocks
Common Stocks
Preferred Stocks
◦ Has first right on dividends, if distributed.
◦ Do not have voting rights.
Cumulative Preferred Stock
◦ Has the right to receive regular dividends that were not declared in prior years.
◦ Such dividends are said to be in arrears.
◦ In addition, any dividends in arrears are normally disclosed in notes to the financial
statements.

12. Issuing Stock
A separate account is used for recording the amount of each class of stock
issued to investors in a corporation.
Stock is often issued by a corporation at a price other than its par. The price at
which stocks are sold depends on a variety of factors, such as:
◦ Financial condition, earnings record, and dividend record of the corporation.
◦ Investor expectations of the corporation’s potential earning power.
◦ General business and economic conditions and expectations.
Cash
Preferred Stock
Common Stock
Issued preferred stock and common stock at par for
cash.
1,500,000
500,000
1,000,000

13. Premium/Discount on Stock
When stock is issued in exchange for assets other than cash, such as land,
buildings, and equipment, the assets acquired are recorded at their fair market
vale. If this value cannot be determined, the fair market price of the stock issued
is used.
Cash
Preferred Stock
Paid-in capital in excess of par – preferred stock
Issued $50 par preferred stock at $55.
110,000
100,000
10,000
Land
Common Stock
Paid-in capital in excess of par – preferred stock
Issued $10 par common stock, value at $12 per
share for
land.
120,000
100,000
20,000

14. Accounting for Dividends
When a board of directors declares a cash dividend, it authorizes the distribution of cash to stock
holders.
When a board of directors declares a stock dividend, it authorizes the distribution of stock to stock
holders.
In both cases, declaring a dividend reduces the retained earnings of the corporation.
Conditions for Cash Dividend.
1. Sufficient retained earnings.
2. Sufficient cash.
3. Formal action by the board of directors.
Three dates included in the dividend announcement
1. Date of declaration is the date the board of directors announced the dividend.
2. Date of record is the date the corporations uses to determine which stock holders will receive the
dividend. Stocks are sold with-dividend till this date.
3. Date of payment is the date on which dividend is paid to stockholders. During the date of record and date
of payment, the stock price is quoted as selling ex-dividends.

15. Cash Dividend
On Oct 1, Hiber Corp. declares cash dividends as below, date of record Nov 10 and date of payment
Dec 02.
Oct 01 the declaration date
Nov 10 date of record
Dec 02 date of payment
Dividend per Share Total Dividend
Preferred stock, $100 par, 5,000 shares outstanding
Common stock, $10 par, 100,000 shares outstanding
Total
$2.50
$0.30
$12,500
30,000
$42,500
Oct 01 Cash Dividend
Cash Dividends Payable
42,500
42,500
Dec 02 Cash Dividends Payable
Cash
42,500
42,500

16. Stock Dividend
Stock dividend is a distribution of shares of stock to stockholders. Stock dividends are normally
declared on common stocks and issued to common stockholders.
The recording of a stock dividend affects only stockholders’ equity. Specifically, the amount of the
stock dividend is transferred from Retained Earnings to Paid-In Capital. The amount transferred is
normally the fair value (market price) of the shares issued in stock dividend.
The stockholders’ equity account of Hendrix Corp. as of Dec 15 was:
On Dec 15, Hendrix Corp. declares a stock dividend of 5% or 100,000 shares (2,000,000shares *
5%) to be issued on Jan 10 to stockholders on record on Dec 31. The market price of shares on
Dec 15 was $31.
Common stock, $20 par (2,000,000shares issued)
Paid-in Capital in Excess of Par – Common Stock
Retained Earnings
$40,000,000
9,000,000
26,600,000

17. Stock Dividend
Entry to record the dividend on Dec 15.
After the preceding entry is recorded, Stock Dividends will have a debit balance of $3,100,000. Like cash
dividends, the stock dividends account is closed to Retained Earnings at the end of the accounting period.
On Jan 10, the stock dividend is distributed to stockholders by issuing 100,000 share of common stock.
Dec 15 Stock Dividend
Stock Dividends Distributable
Paid-in Capital in Excess of Par – Common Stock
Dividend 5% (100,000 share) stock dividend on
$20 par common stock with a market price of
$31 per share.
3,100,000
2,000,000
1,100,000
Jan 10 Stock Dividend Distributable
Common Stock
2,000,000
2,000,000

18. Stock Split
A stock split is a process by which a corporation reduces the par or stated value of its
common stock and issues a proportionate number of additional shares.
Stock split applies to all common shares including the issued, unissued, and treasury
shares.
Market value will also split by 5 times.
Stock split do not require a general entry.
Before Split After Split
Number of Shares 10,000 50,000
Par value per share * $100 * $20
Total $1,000,000 $1,000,000