Elements of Accountancy · Ch 5 — Accounting for Share Capital
Issue of Shares at a Premium
Issue of Shares at a Premium
When a company is financially strong and well-managed, its shares are often issued at a premium — that is, at a price higher than the nominal (face) value. For example, if a share of ₹100 is issued for ₹105, it is issued at a premium of 5% (₹5 per share).
The premium amount can technically be called at any stage of the share issue — application, allotment, or calls. In practice, it is most commonly called with the allotment money, sometimes with the application money, and rarely with a call.
The premium collected is not part of share capital. It is credited to a separate account called Securities Premium Reserve (also called Securities Premium Account). This account appears under the head 'Reserves and Surpluses' on the liabilities side of the Balance Sheet.
The Securities Premium Reserve can be used only for the following five purposes:
- To issue fully paid bonus shares (to the extent not exceeding the unissued share capital).
- To write off preliminary expenses of the company.
- To write off the expenses of, or commission paid, or discount allowed on any securities of the company.
- To pay the premium on redemption of preference shares or debentures.
- To purchase its own shares (buy-back of shares).
Journal Entries for Shares Issued at a Premium
The journal entry depends on when the premium amount is called.
1. Premium called with Application Money
When the application money includes the premium, the amount received is first credited to Share Application Account. On allotment, the application money is transferred — the face value portion goes to Share Capital, and the premium portion goes to Securities Premium Reserve.
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Bank A/c Dr. | xxx | |||
| To Share Application A/c | xxx | |||
| (Money received on application for ___ shares @ ₹___ per share including premium) | ||||
| Share Application A/c Dr. | xxx | |||
| To Share Capital A/c | xxx | |||
| To Securities Premium Reserve A/c | xxx | |||
| (Transfer of application money to share capital and securities premium) |
2. Premium called with Allotment Money
This is the most common case. The allotment amount due is split — the face value part is credited to Share Capital, and the premium part is credited to Securities Premium Reserve.
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Share Allotment A/c Dr. | xxx | |||
| To Share Capital A/c | xxx | |||
| To Securities Premium Reserve A/c | xxx | |||
| (Amount due on allotment of shares @ ₹___ per share including premium) | ||||
| Bank A/c Dr. | xxx | |||
| To Share Allotment A/c | xxx | |||
| (Allotment money received including premium) |
3. Premium called with Call Money
When the premium is called with a call (e.g., first call or final call), the call amount due is similarly split. …