SHAREHOLDERS' EQUITY

Complete Account Reference Guide

Philippine Corporate Accounting (PFRS) | Millan 2025 | RFBT2 / Accounting Review

What is Shareholders' Equity?

Think of a company as a cake. The whole cake = Total Assets (everything the company owns). The
slice owed to banks and creditors = Liabilities. What's left after paying all debts = Shareholders'
Equity. It is the owners' residual claim on the company's assets.
Formula: Total Assets − Total Liabilities = Shareholders' Equity

The Four Main Components

1. SHARE CAPITAL 2. RETAINED EARNINGS 3. OTHER EQUITY 4. TREASURY SHARES
What shareholders paid in Profits kept in the business OCI & misc. items Shares bought back
(REDUCES equity)

COMPONENT 1 — SHARE CAPITAL

The Big Picture

Share Capital is the money (or assets) investors put INTO the company in exchange for ownership. It
represents the permanent investment of shareholders — it does not come back unless shares are
retired or the company is dissolved.
Relationship to the component: Share Capital is the foundation of shareholders' equity. Every other
account inside Share Capital tracks either the par value of shares, the amount investors paid above
par, or a shortfall below par. Together they answer one question: "How much did investors
contribute to this company?"

Accounts Under Share Capital

① Share Capital (a.k.a. Common/Ordinary or Preference Share Capital)

✦ What it means in plain terms:

→ The total par (or stated) value of all shares that have been fully issued and paid. Think of it as the 'face
value' stamp on each share, multiplied by how many shares were issued.
✦ How it relates to the component:
→ This is the MAIN account under Share Capital. Everything else adjusts or supports it.
✦ How it is used:
→ When investors buy shares and pay in full, this account is credited (increased). It sits on the balance
sheet as a permanent source of financing.
✦ Normal Balance: CREDIT | Basis: Par Value × Shares Issued
→ For par shares: Share Capital = par × shares. For no-par with no stated value: full price × shares (no
Share Premium exists). For no-par with stated value: stated value × shares.

② Subscribed Share Capital

✦ What it means in plain terms:

→ An investor has PROMISED to buy shares and signed a subscription agreement — but has NOT yet fully
paid. It is like a layaway for shares: the reservation is made, the payment is pending.
✦ How it relates to Share Capital:
→ It is a temporary holding place. Once the investor pays in full, Subscribed Share Capital is converted
(derecognized) and replaced by Share Capital.
✦ How it is used:
→ Step 1: Subscription made → Subscribed Share Capital increases (credit). Step 2: Full payment received
→ reclassified to Share Capital.
✦ Normal Balance: CREDIT | Basis: Par or Stated Value × Shares Subscribed

③ Subscription Receivable ⚠ CONTRA-EQUITY (Millan 2025)

✦ What it means in plain terms:

→ The amount a subscriber still OWES the company after making their subscription promise. It is the
'balance due' on the layaway.
✦ How it relates to Share Capital:
→ It REDUCES the value of Subscribed Share Capital. You cannot show the subscribed shares at full value
if the investor has not paid yet — the receivable offsets it. Under Millan, it is ALWAYS a deduction from
equity, never a current asset.
✦ How it is used:
→ It increases when a new subscription is made (cash not yet received). It decreases as the subscriber
pays installments or pays in full.
✦ Normal Balance: DEBIT (contra-equity) | Millan Rule: NEVER reclassify as a current asset.

④ Share Premium (Additional Paid-In Capital / APIC)

✦ What it means in plain terms:

→ The extra amount investors paid ABOVE the par value. If shares have a P100 par but sold at P130, the
P30 excess per share goes here.
✦ How it relates to Share Capital:
→ Share Premium is a companion to Share Capital. Together they form the total paid-in capital. Share
Capital holds the par; Share Premium holds the premium. Both come from investors paying into the
company.
✦ How it is used:
→ Increases when: shares are sold above par, treasury shares are resold above their cost, donations are
received, or certain other capital transactions occur.
→ Decreases when: treasury shares are reissued below cost (the loss is first charged here, then to
Retained Earnings if insufficient).
✦ Normal Balance: CREDIT | Basis: (Issue Price − Par Value) × Shares
→ IMPORTANT: If shares are no-par with NO stated value, Share Premium does NOT exist — all proceeds
go to Share Capital.

⑤ Discount on Share Capital ⚠ CONTRA-EQUITY

✦ What it means in plain terms:

→ The shortfall when shares are issued BELOW par value. If shares have P100 par but are sold at P90, the
P10 gap per share is the discount.
✦ How it relates to Share Capital:
→ It is a deduction from Share Capital. It signals the company received less than the 'minimum' the law
expected.
✦ How it is used:
→ It is recorded for completeness but is practically rare — the Revised Corporation Code prohibits issuing
shares below par, and officers/directors who authorize it face personal liability.
✦ Normal Balance: DEBIT (contra-equity) | Basis: (Par Value − Issue Price) × Shares

⑥ Preference Share Capital

✦ What it means in plain terms:

→ Same mechanics as ordinary Share Capital, but for preference (preferred) shareholders — investors
who get priority in dividends and liquidation.
✦ How it relates to Share Capital:
→ It is a separate, parallel track of Share Capital for a different class of shares. Both classes are tracked
separately on the balance sheet, but both belong inside the Share Capital component.
✦ How it is used:
→ Exactly like ordinary Share Capital — credits when preference shares are issued, debits when
preference shares are retired. Dividends declared to preference shareholders reduce Retained Earnings,
not this account.
✦ Normal Balance: CREDIT | Basis: Par or Stated Value × Preference Shares Issued

⑦ Stock Dividends Distributable (Temporary Account)

✦ What it means in plain terms:

 → When the board declares a share (stock) dividend, they have decided to give shareholders more shares
instead of cash. This account records that obligation from the time the dividend is declared until the
actual shares are issued.
✦ How it relates to Share Capital:
→ It is a bridge account. Once the shares are actually distributed, Stock Dividends Distributable is closed
out and becomes Share Capital. It lives inside equity (not liabilities) because no cash is leaving the
company.
✦ How it is used:
→ Declaration: Debit Retained Earnings, Credit Stock Dividends Distributable (at par × shares to distribute,
plus Share Premium for the excess).
→ Distribution: Debit Stock Dividends Distributable, Credit Share Capital.
✦ Normal Balance: CREDIT | Basis: Par Value × Shares to Be Distributed

⑧ Donated Capital

✦ What it means in plain terms:

→ Someone (a shareholder, the government, another entity) gives the company an asset or cash for FREE
— no shares issued, no debt incurred in return.
✦ How it relates to Share Capital:
→ It is often grouped within contributed capital (alongside Share Capital and Share Premium) because it
represents value that came in from the outside. Unlike Share Premium, no shares were issued for it.
✦ How it is used:
→ Recorded at the fair value of whatever was donated on the date of donation. Rarely decreases;
sometimes used in quasi-reorganizations to absorb a deficit.
✦ Normal Balance: CREDIT | Basis: Fair Value of Donated Asset on Donation Date

Subscription Cycle — Journal Entries

Step Journal Entry

Step 1: Investor subscribes DR Subscription Receivable

(promises to buy) CR Subscribed Share Capital (par value)
CR Share Premium (if above par)

Step 2: Investor pays (fully or DR Cash

partially) CR Subscription Receivable

Step 3: Fully paid — reclassify DR Subscribed Share Capital

CR Share Capital

COMPONENT 2 — RETAINED EARNINGS

The Big Picture
Retained Earnings is the cumulative profit the company has earned over its lifetime, minus
everything it has paid out as dividends. It is money generated BY the company itself — not
contributed by investors.
Relationship to the component: Retained Earnings is the main score of how profitable the company
has been over time. The board can restrict portions of it (Appropriated RE), or it can turn negative
(Deficit). All three versions — Unappropriated, Appropriated, and Deficit — live inside the Retained
Earnings component.
Key formula: Beginning RE + Net Income − Dividends Declared ± Prior Period Adjustments =
Ending RE

Accounts Under Retained Earnings

① Retained Earnings — Unappropriated (Free / Unrestricted RE)

✦ What it means in plain terms:

→ The portion of profit that is FREE — available to be paid out as dividends or used for any purpose the
board chooses.
✦ How it relates to the component:
→ This is the main, default Retained Earnings account. When people say 'Retained Earnings' on a simple
balance sheet, they usually mean this — the unrestricted portion.
✦ How it is used:
→ Increases: When net income is closed into it at year-end.
→ Decreases: When dividends are declared, when a net loss occurs, or when the board sets some aside as
Appropriated RE.
✦ Normal Balance: CREDIT | Dividends can ONLY be declared from this account.

② Retained Earnings — Appropriated (Restricted RE)

✦ What it means in plain terms:

→ A portion of Retained Earnings that the Board of Directors has LOCKED AWAY for a specific purpose —
like saving up for a factory expansion, paying off a loan, or meeting a legal reserve requirement. The
money is still inside the company; it is just earmarked and cannot be declared as dividends while
restricted.
✦ How it relates to the component:
→ It is a subset of Retained Earnings, not a separate component. It does NOT reduce total equity — it just
reclassifies some unappropriated RE as restricted. Total equity stays the same.
✦ How it is used:
→ Board appropriates: DR Retained Earnings (Unappropriated), CR Retained Earnings (Appropriated).
→ Purpose fulfilled/released: DR Retained Earnings (Appropriated), CR Retained Earnings
(Unappropriated) — it goes back to free RE.
✦ Normal Balance: CREDIT | The Board decides the amount; no formula — it is a policy decision.
 ③ Deficit (Negative Retained Earnings)

✦ What it means in plain terms:

→ When a company has accumulated more LOSSES than profits over its lifetime, Retained Earnings turns
negative — this negative balance is called a Deficit. It means the company has destroyed more value than
it has created.
✦ How it relates to the component:
→ A deficit is presented as a DEDUCTION inside the Retained Earnings component — it directly reduces
total shareholders' equity. In extreme cases, it can wipe out all equity and result in negative equity overall.
✦ How it is used:
→ Increases (deficit grows): Each net loss period adds to the cumulative deficit.
→ Decreases (deficit shrinks): Future net income reduces the deficit, bringing it back toward zero.
✦ Normal Balance: DEBIT (abnormal for equity) | Basis: Cumulative net losses exceeding cumulative
net income
→ LEGAL NOTE: Dividends CANNOT be declared when there is a deficit. You can only pay dividends out of
actual profits.

How Dividends Affect Retained Earnings

Effect on Share
Dividend Type Effect on Retained Earnings Effect on Total Equity
Capital

Cash Dividend ↓ Decreases No effect ↓ Decreases (cash

leaves)

Share (Stock) Dividend ↓ Decreases (reclassified) ↑ Increases (shares No effect — just a

issued) reclassification

Property Dividend ↓ Decreases (at fair value) No effect ↓ Decreases (asset

leaves)

A share dividend never changes total equity — it simply moves money from Retained Earnings into
★ Share Capital. Only cash and property dividends actually reduce total equity because assets leave the
company.

COMPONENT 3 — OTHER COMPONENTS OF EQUITY (OCI Reserves)

The Big Picture

These are gains and losses that belong to the company's owners but are NOT recorded in net
income (profit or loss). Under PFRS, certain value changes 'bypass' the income statement and go
straight to equity — they are called Other Comprehensive Income (OCI) items.
Think of it this way: OCI items are changes in value that are REAL but not yet 'realized' (not yet
 locked in through a sale or final transaction). The standard setters decided it would be misleading to
run these through profit or loss — so they park them in equity instead, until they are realized.

Accounts Under Other Components of Equity

① Revaluation Surplus (PPE Revaluation Reserve)

✦ What it means in plain terms:

→ When a company revalues its Property, Plant & Equipment (land, buildings, machinery) to fair value,
and the fair value is HIGHER than the book value, the gain is recorded here — NOT in profit or loss.
✦ How it relates to the component:
→ It is an OCI item. The gain is real (the asset is worth more) but unrealized (the company has not sold the
asset). PFRS requires parking it in equity, not income.
✦ How it is used:
→ Increases: When an asset is revalued upward (fair value > carrying value).
→ Decreases: When the asset is subsequently depreciated (the surplus is 'realized' gradually and
transferred to Retained Earnings), when the asset is sold (the remaining surplus is reclassified to RE), or
when the asset is later revalued downward (reversal).
✦ Normal Balance: CREDIT | This is NOT distributable as cash dividends while it remains unrealized.

② Cumulative Translation Adjustment (CTA)

✦ What it means in plain terms:

→ When a parent company has a foreign subsidiary, the subsidiary's financial statements must be
translated into the parent's presentation currency. Exchange rates fluctuate, creating translation gains or
losses — these accumulate here.
✦ How it relates to the component:
→ This is an OCI item specific to consolidated financial statements. It is not about operations — it is purely
about the effect of currency exchange rates on translating foreign subsidiary balances.
✦ How it is used:
→ Increases or decreases depending on whether the exchange rate movement is favorable or unfavorable
at the reporting date.
→ Reclassified to profit or loss only when the foreign subsidiary is disposed of (sold or liquidated).
✦ Normal Balance: Either (can be debit or credit) | Only relevant when consolidated FS are involved.

③ Other OCI Reserves (e.g., FVOCI Reserve for Financial Instruments)

✦ What it means in plain terms:

→ For certain financial assets measured at Fair Value through Other Comprehensive Income (FVOCI),
unrealized gains and losses go directly into equity — not into profit or loss. Common examples: equity
instruments designated at FVOCI, debt instruments classified at FVOCI.
✦ How it relates to the component:
→ Same OCI logic: the change in fair value is real but unrealized, so it bypasses income and parks in equity
 until the instrument is sold (for debt) or permanently (for equity at FVOCI — gains never get recycled to
P&L).
✦ How it is used:
→ Increases: When fair value rises above cost/carrying value.
→ Decreases: When fair value falls below carrying value.
→ On disposal of a debt FVOCI instrument: the accumulated OCI balance is reclassified ('recycled') to
profit or loss.
✦ Normal Balance: Either (can be debit or credit)

COMPONENT 4 — TREASURY SHARES

The Big Picture

Treasury Shares are a company's own shares that it BOUGHT BACK from the open market or from
shareholders — but has NOT retired. They are held 'in the treasury' (by the company itself). This is
the OPPOSITE of issuing shares — instead of cash coming in, cash goes OUT to reacquire ownership.
Critical point: Treasury Shares REDUCE total shareholders' equity. They are shown as a deduction —
a negative number — on the balance sheet. The shares exist, but they lose their rights: no dividends,
no voting, no participation in liquidation while held by the corporation.
Millan Rule: Treasury shares are ALWAYS recorded at COST (the price paid to reacquire them) —
never at par value, never at original issue price.

Accounts Under Treasury Shares

① Treasury Shares (Main Account)

✦ What it means in plain terms:

→ The cost of all own shares currently held by the company. Think of it as 'we spent this much money
buying our own shares back from the market.'
✦ How it relates to the component:
→ It is the main (and usually the only) account under Treasury Shares. It is presented as a DEDUCTION
from total equity — the bigger this balance, the more equity is reduced.
✦ How it is used:
→ Increases (debit): When the company buys back its own shares. More buybacks = more deduction from
equity.
→ Decreases (credit): When the company either (a) reissues/resells the treasury shares, or (b) formally
retires them (cancels them permanently).
✦ Normal Balance: DEBIT (contra-equity) | Basis: Cost (price paid to reacquire), never par value
→ While held as treasury: no dividends, no voting rights, no liquidation rights.

② Share Premium — Treasury (a.k.a. Paid-in Capital from Treasury Transactions)

 ✦ What it means in plain terms:
→ When treasury shares are RESOLD (reissued) at a price HIGHER than what the company originally paid
for them, the excess gain is recorded here. It is the profit on the resale — but since it is a capital
transaction (not an operations transaction), it cannot go to profit or loss.
✦ How it relates to Treasury Shares:
→ It is a companion to Treasury Shares that only arises from treasury share transactions. It absorbs gains
(credits) when treasury shares are resold above cost.
✦ How it is used — the complete logic:
→ Treasury resold ABOVE cost: excess goes to Credit Share Premium — Treasury. (Gain stays in equity,
not income.)
→ Treasury resold BELOW cost (loss sequence): First, debit Share Premium — Treasury to absorb the loss.
If Share Premium — Treasury is exhausted, the remaining loss is charged to Retained Earnings.
→ Once treasury shares are fully reissued or retired, this account may be zeroed out.
✦ Normal Balance: CREDIT | Basis: (Reissue Price − Cost) × Shares Reissued

Treasury Share Cycle — Journal Entries

Transaction Journal Entry

Step 1: Buyback (any price — DR Treasury Shares (at cost)

recorded at cost) CR Cash

Step 2a: Reissue ABOVE cost DR Cash

CR Treasury Shares (at cost)
CR Share Premium — Treasury (excess)

Step 2b: Reissue BELOW cost DR Cash

DR Share Premium — Treasury (available balance)
DR Retained Earnings (if SP–Treasury exhausted)
CR Treasury Shares (at cost)

BONUS — NON-CONTROLLING INTEREST (NCI)

Non-Controlling Interest (Minority Interest)

✦ What it means in plain terms:

→ When a parent company prepares consolidated financial statements, it includes 100% of a subsidiary's
assets and liabilities — even the portion it does NOT own. NCI represents the equity of that subsidiary
that belongs to the OTHER (minority) shareholders, not the parent.
→ Example: Parent owns 80% of Subsidiary. The remaining 20% ownership = NCI.
✦ How it relates to equity:
→ NCI is presented WITHIN shareholders' equity on the consolidated balance sheet, but SEPARATELY from
the parent's equity. It is equity — just equity belonging to someone else (the minority shareholders).
✦ How it is used:
→ Increases: Subsidiary earns net income (NCI gets its share).
→ Decreases: Subsidiary incurs losses; dividends are paid to NCI shareholders.
✦ Normal Balance: CREDIT | Basis: NCI% × Subsidiary's Net Assets / Net Income
→ Only appears in CONSOLIDATED financial statements — not in the parent's standalone or separate FS.

QUICK REFERENCE — ALL ACCOUNTS AT A GLANCE

Normal
Account Increases When... Decreases When...
Balance

── SHARE CAPITAL ──

Share Capital Credit Shares fully issued/paid Shares retired

Subscribed Share Capital Credit New subscription made Subscriber pays in full → moves to
Share Capital

Subscription Receivable Debit ⚠ New subscription made Subscriber pays

Share Premium (APIC) Credit Shares sold above par; treasury Treasury resold below cost (absorbs
resold above cost loss)

Discount on Share Capital Debit ⚠ Shares issued below par Rarely decreases

Preference Share Capital Credit Preference shares issued Preference shares retired

Stock Dividends Distributable Credit Share dividend declared Shares actually distributed

Donated Capital Credit Asset/cash donated to company Quasi-reorganization (rare)

── RETAINED EARNINGS ──

Retained Earnings Credit Net income closed in Net loss; dividends declared;
(Unappropriated) appropriated by board

Retained Earnings (Appropriated) Credit Board appropriates/restricts RE Appropriation released back to

unappropriated RE

Deficit Debit ⚠ Net losses accumulate Future net income earned

── OTHER COMPONENTS ──

Revaluation Surplus Credit PPE revalued upward Depreciation realizes it; asset sold;
revalued down

Cumulative Translation Adj. Either Favorable FX rate movement Unfavorable FX rate movement

Other OCI Reserves (FVOCI) Either Fair value increases Fair value decreases

── TREASURY SHARES ──

Treasury Shares Debit ⚠ Company buys back shares Shares reissued or retired

Share Premium — Treasury Credit Treasury resold above cost Treasury resold below cost (absorbs
loss first)
 ⚠ Accounts marked ⚠ DEBIT are CONTRA-EQUITY — they reduce (not increase) total shareholders' equity.

LEGAL NOTES — REVISED CORPORATION CODE (R.A. 11232)

25%/25% Rule: At least 25% of authorized capital must be SUBSCRIBED, and at least 25% of total
★
subscriptions must be PAID upon subscription.

No Below-Par Issuance: Shares cannot be sold below par or stated value ('no watered stock'). Any
★ deficiency = Discount on Share Capital (contra-equity). Officers/directors who authorized it face personal
liability.

100% Retained Earnings Limit: Corporations generally cannot retain surplus profits exceeding 100% of
★ paid-in capital without a valid business reason (e.g., expansion, loan covenant). Excess must be declared as
dividends.

Dividends from Unrestricted RE Only: Dividends can only be declared from unappropriated (free)
★
Retained Earnings. No dividends when there is a Deficit.

Treasury Shares — No Rights: Treasury shares have no voting rights, no right to dividends, and no
★
participation in liquidation while held by the corporation.

Authorized Capital: The maximum shares the corporation can issue. Exceeding this is illegal; amendment
★
requires majority board + 2/3 shareholder vote + SEC approval.

MEMORY TRICKS & EXAM REMINDERS

Credit accounts = ADD to equity Debit accounts = REDUCE equity

✓ Share Capital — investors pay in ✗ Subscription Receivable — amount still owed
✓ Share Premium — extra investors pay above par ✗ Discount on Share Capital — below-par shortfall
✓ Retained Earnings — profits kept ✗ Deficit — accumulated losses
✓ OCI Reserves — unrealized value changes ✗ Treasury Shares — buybacks
✓ Donated Capital — gifts received

Quick Transaction Recall

When this happens... ...these accounts move

Investor buys shares and pays in full Share Capital ↑ (and Share Premium ↑ if above par)

Investor subscribes but hasn't paid yet Subscribed Share Capital ↑, Subscription Receivable ↑

Subscriber pays off what they owe Cash ↑, Subscription Receivable ↓

Subscription fully paid — finalize it Subscribed Share Capital ↓ → Share Capital ↑

Company earns profit at year-end Retained Earnings (Unappropriated) ↑

Company declares cash dividend Retained Earnings ↓, Dividends Payable ↑

Company declares share dividend Retained Earnings ↓, Stock Dividends Distributable ↑

Board restricts some retained earnings RE (Unappropriated) ↓ → RE (Appropriated) ↑

Company buys back its own shares Treasury Shares ↑ (reduces total equity)

Treasury shares resold above cost Cash ↑, Treasury Shares ↓, Share Premium—Treasury ↑

Treasury shares resold below cost Cash ↑, Share Premium—Treasury ↓ (then RE if needed),
Treasury Shares ↓

PPE revalued upward Asset ↑, Revaluation Surplus ↑ (OCI — not income)

Basis: Millan 2025 | Philippine PFRS | Revised Corporation Code (R.A. 11232)
For RFBT2 / Accounting Review | All rules follow Millan's treatment unless otherwise noted