Ordinary Shares

                                            Ordinary Share[pic 1][pic 2]

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In this chapter, we address the following questions:

• What is a share?
• What is a share capital or capital stock?
• What types of share can a company have?
• What is an ordinary share?
• What are the features, advantages and disadvantages of Ordinary Shares?
• Who should use ordinary shares?
• What are the types of ordinary share?
• What are dividends?
• What is the share price?
• Why might a company issue ordinary shares?
• Benefits of ordinary shares
• Some things to consider when investing in ordinary shares
• Accounting for Ordinary Share Capital Issue

OVERVIEW

The three forms of business organization are single proprietorship, partnership, and corporation, does not affect the asset and liability sections of the statement of financial position. The only difference is in the owners' equity sections. Sole proprietorships and partnerships use capital accounts and ultimately combine the owners' contributions and accumulated earnings. Corporations separately report contributed capital and accumulated profits in accordance with some legal provisions.

The owners' equity section of a corporation's statement of financial position is called shareholders' equity. Shareholders' equity or stockholders' equity is the residual interest of owners in the net assets of a corporation measured by the excess of assets over liabilities.Shareholders' equity has two major components-share capital (contributed or paid-in capital) and retained earnings. Share capital reflects the amount of resources received by a corporation as a result of investment by shareholders, donations or other share capital transactions. Retained earnings (or accumulated profits or losses) are the amount of capital accumulated and retained through the profitable operations of the business. The following is the shareholders' equity section of a statement of financial position:

Shareholders' Equity

Share Capital

Preference Shares-P50 par, 1000 shares authorized, issued and outstanding                                                        P50, 000

        Ordinary Shares-P5 par, 30,000 shares authorized,

20,000 shares issued and outstanding                                  P100, 000

        Share Premium- Ordinary                                                           50,000          150,000[pic 9]

Total Share Capital                                                        P200, 000

Retained Earnings                                                                80,000[pic 10]

Total Shareholders' Equity                                                        P280, 000

The Philippine Accounting Standards (PAS) has adopted the terminology used in the International Accounting Standards (IAS).

Philippine Term                                                                     IAS Term

Capital Stock                                                         Share Capital

Subscribed capital stock                                         Subscribed share capital

Common Stock                                                 Ordinary Share Capital

Preferred Stock                                                 Preference share capital

Additional paid in capital                                         Share premium

Retained earnings (deficit)                                         Accumulated profits (losses)

Retained earnings appropriated                                Appropriation reserve

Revaluation surplus                                                 Revaluation reserve

Treasury stock                                                 Treasury share

In this chapter, the discussion is only for the first type of share capital-the ordinary share capital.

Share

• If you own a share, you own a portion of a company. In the same way you can see your ownership of a company as a slice of pie, cut out of a bigger pie.
• Someone who owns one or more shares is called a shareholder.
• Shareholders may receive cash flows (dividends) if a company’s board of directors declares that the company has performed well and has enough profit to distribute to its shareholders.
• A share in the company gives you the right to vote on decisions affecting the company.
• You can also call a share, ‘equity’ or ‘stock’.

Share Capital or Capital Stock

The term "capital stock" or "share capital" is the amount fixed in the articles of incorporation to be subscribed and paid in or secured to be paid in by the shareholders of the corporation, either in money or property or services, at the organization of the corporation, or afterwards and upon which the corporation is to conduct its operations.

Actually, the amount fixed in the articles of incorporation is called the authorized share capital.

The share capital is divided into shares evidenced by a share certificate.

A share represents the interest or right of a shareholder in the corporation. The four rights of a shareholder are:

1. To share in the earnings of the corporation

2. To vote in the election of directors and in the determination of certain corporate policies.

3. To subscribe for additional share issues- this is the right of preemption or stock right.