Q.Premium on Issue of Debenture is
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Let’s start with something you already know. Suppose you buy a ₹10 note from a friend for ₹15. You paid ₹5 more than the face value. That extra ₹5 is a premium. In the business world, when a company issues shares worth ₹10 each but investors are willing to pay ₹15, the extra ₹5 per share is called securities premium. It’s not profit from selling goods — it’s money raised over and above the face value of shares.
Now, the company cannot simply treat this premium as free cash to distribute as dividends. The law (Companies Act, 2013) says this money must be used only for specific purposes. That’s the whole point: securities premium is a reserve with strings attached.
What is Securities Premium?
When a company issues shares at a price higher than their face value, the excess amount collected is credited to a separate account called Securities Premium Reserve. This is shown under Reserves and Surplus on the liabilities side of the Balance Sheet.
For example, if a company issues 10,000 shares of ₹10 each at ₹15, the total amount received is ₹1,50,000. Of this:
- ₹1,00,000 (10,000 × ₹10) is share capital.
- ₹50,000 (10,000 × ₹5) is securities premium.
Securities premium is not revenue profit. It is a capital reserve and cannot be used for paying dividends or writing off revenue losses.
Why Does It Matter?
The premium represents extra money investors paid because they believed the company was worth more than its face value. Using it wrongly would mislead shareholders and violate the law. So the Act lists five specific uses — and only these — for securities premium:
- Issue of fully paid bonus shares to existing shareholders (capitalisation of reserves).
- Writing off preliminary expenses (costs of forming the company).
- Writing off expenses, commission, or discount on issue of shares or debentures.
- Providing for the premium payable on redemption of preference shares or debentures.
- Buying back its own shares (only the premium portion can be used for this).
You cannot use securities premium to pay dividends, cover operating losses, or for any purpose not listed above. That’s a common mistake in exams.
Accounting Treatment
When the premium is received, the journal entry is:
Bank A/c Dr. (total amount received)
To Share Capital A/c (face value)
To Securities Premium Reserve A/c (premium amount)
When it is used, the Securities Premium Reserve account is debited (reduced), and the relevant expense or reserve account is credited.
Example: Writing off preliminary expenses of ₹20,000 using securities premium
| Date | Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|---|
| Securities Premium Reserve A/c Dr. | 20,000 | |||
| To Preliminary Expenses A/c | 20,000 | |||
| (Being preliminary expenses written off) |
Example: Issuing bonus shares (say 1,000 bonus shares of ₹10 each fully paid)
| Date | Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|---|
| Securities Premium Reserve A/c Dr. | 10,000 | |||
| To Bonus to Shareholders A/c | 10,000 | |||
| (Being amount transferred for bonus issue) |
Then, when bonus shares are actually issued: …
Correct option: (d) a liability.
Premium on issue of debentures is the excess over face value collected from debenture-holders. It is a capital receipt, credited to the Securities Premium / Debenture Premium account and shown on the liabilities (equity and liabilities) side of the Balance Sh …
Showing the 12 most recent of 24 on this concept.
- CBSE 2026Set 67/4/11 markMCQQ.(a) ____________ debentures refer to those debentures where a charge is created on the assets of the company for the purpose of payment in case of default. (A) Unsecured (B) Secured (C) Convertible (D) Registered(OR)(b) As per the provisions of Companies Act, 2013, the amount received as Securities Premium cannot be utilised to : (A) Issue fully paid bonus shares to the members (B) Write off preliminary expenses of the company (C) Purchase fixed assets (D) Purchase its own shares, i.e. buyback of shares
›Reveal solutionSolution
Part (a): Secured debentures — (B). Part (b): Securities Premium cannot be used to purchase fixed assets — (C).
Part (a)
A debenture is a written acknowledgement of a debt. When the company creates a charge on its assets to back repayment, the debentures are secured — on default the holders can enforce the charge and realise their money from those assets. The charge may be fixed (on a specific asset) or floating (on a class of assets).
- (A) Unsecured — no charge on assets.
- (C) Convertible — can be converted into equity shares (a conversion feature, not a security feature). …
- CBSE 2026Set ANNUAL1 markQ.Write any one usage of securities premium amount.
›Reveal solutionSolution
One lawful use of the securities premium is to issue fully paid bonus shares to members.
Under Section 52 of the Companies Act, 2013, the Securities Premium Account can be applied only for specified purposes, such as:
- issuing fully paid bonus shares to members;
- writing off preliminary expenses of the company;
- writing off expenses, commission or discount on issue of shares/debentures;
- providing the premium payable on redemption of redeemable preference shares or debentures; …
- CBSE 2026Set ANNUAL1 markMCQQ.Securities Premium Reserve can be used for(a) paying interest on debentures(b) issuing fully paid bonus shares to the members(c) paying tax liability(d) paying dividend on shares
›Reveal solutionSolution
Securities Premium Reserve has a legally restricted list of uses under Section 52 of the Companies Act, 2013 — issuing fully paid bonus shares is one of them; routine operating expenses like interest, tax, or dividend are not.
Securities Premium Reserve is the amount a company receives over and above the face value of its shares/debentures at the time of issue. Because this represents capital, not revenue profit, the Companies Act, 2013 (Section 52) tightly restricts how it may be applied. The permitted uses are:
- Issuing fully paid bonus shares to members.
- Writing off preliminary expenses of the company.
- Writing off the expenses, commission, or discount allowed on any issue of shares or debentures.
- Providing for the premium payable on redemption of redeemable preference shares or debentures.
- Buy-back of its own shares (under Section 68). …
- CBSE 2025Set 67/4/11 markMCQQ.(a) 'Reserve Capital' can be utilised : (A) any time during the life of the company. (B) only at the time of winding up of the company. (C) to issue fully paid bonus shares. (D) to provide for premium on the redemption of preference shares.(OR)(b) An offer of securities or invitation to subscribe securities to a select group of persons is called : (A) Sweat equity (B) Employee Stock Option Plan (C) Private placement (D) Buy-back of shares
›Reveal solutionSolution
Part (a): (B) Reserve Capital can be called only at winding up.
Part (b): (C) An offer to a select group is a Private placement.
Part (a)
Reserve Capital is the portion of a company's uncalled share capital that, under Section 65 of the Companies Act 2013, the company has resolved (by special resolution) not to call up except in the event of and for the purposes of winding up. It exists to give creditors an assured cushion at liquidation, so it cannot be used during the company's normal life, nor for issuing bonus shares or providing premium on redemption of preference shares (those come from free reserves / Securities Premium). Do not confuse it with Capital Reserve (a reserve created out of capital profits, shown on the liabilities side). …
- CBSE 2025Set ANNUAL1 markMCQQ.A company issues its shares at a premium under which section of Indian Companies Act, 2013 ? (A) 78 (B) 52 (C) 53 (D) None of these
›Reveal solutionSolution
Shares are issued at a premium under Section 52 of the Companies Act, 2013, so the answer is (B).
Section 52 of the Companies Act, 2013 deals with the Securities Premium Account — the amount received over and above the face value of shares — and prescribes the limited purposes for which it may be used (e.g. issuing fully paid bonus shares, writing off preliminary expenses, providing premium on redemption of debentures/preference shares, buy-back).
…
- CBSE 2025Set ANNUAL1 markMCQQ.The amount received over and above the par value is credited to which account ? (A) Share Capital A/c (B) Calls-in-advance A/c (C) Securities Premium A/c (D) Share Forfeiture A/c
›Reveal solutionSolution
The amount received over and above par value is credited to the Securities Premium Account, so the answer is (C).
When a share with a face value of, say, Rs 10 is issued for Rs 12, the extra Rs 2 is the premium. This premium is not part of share capital; under Section 52 of the Companies Act, 2013 it is transferred to a separate Securities Premium Account.
- Share Capital A/c (A) is credited only with the nominal/par value. …
- CBSE 2025Set ANNUAL1 markQ.Answer in one word/sentence: What type of receipts is the premium received on share?
›Reveal solutionSolution
Answer: Capital receipt.
The amount received as premium on the issue of shares is not earned from normal business operations, so it is a capital receipt (capital profit). It is credited to the Securities Premium Reserve and can be used …
- CBSE 2025Set ANNUAL1 markMCQQ.Which type of profit is premium on issue of shares?(a) Capital gain(b) Normal profit(c) Abnormal profit(d) None of these(a) Capital gain(b) Normal profit(c) Abnormal profit(d) None of these
›Reveal solutionSolution
Premium on issue of shares is a Capital Profit (capital gain), not a normal trading/revenue profit.
When a company issues shares at a price higher than their face/nominal value, the excess amount received is called "securities premium." This amount:
- Does not arise from the day-to-day trading/operating activities of the business (it arises from a capital transaction — the issue of share capital itself).
- Is credited to a separate "Securities Premium" account (shown under Reserves and Surplus in the Balance Sheet), not to the Statement of Profit and Loss.
- Can be used only for specific purposes laid down in Section 52 of the Companies Act, 2013 (e.g., writing off preliminary expenses, issuing bonus shares, premium on redemption of debentures/preference shares, buy-back of shares), unlike a normal trading profit which is freely distributable as dividend. …
- CBSE 2025Set ANNUAL1 markQ.Mention any one purpose for which Securities Premium can be used.
›Reveal solutionSolution
The Securities Premium Reserve cannot be used freely like a general reserve — Section 52 of the Companies Act, 2013 lists the specific purposes it may be applied to.
When a company issues shares (or other securities) at a price higher than their face value, the excess is credited to the Securities Premium Reserve/Account. Because this amount does not represent a trading profit, the law restricts how it can be used. As per Section 52 of the Companies Act, 2013, Securities Premium may be applied only for:
- Issuing fully paid bonus shares to members.
- Writing off the company's preliminary expenses.
- Writing off the discount/commission allowed on issue of shares or debentures. …
- CBSE 2024Set MARCH1 markQ.Under which head 'securities premium reserve account' appears in the balance-sheet?
›Reveal solutionSolution
Securities Premium Reserve appears under Reserves and Surplus (Shareholders' Funds) in a company's balance-sheet.
In this GSEB / Gujarat HSC Class-12 Commerce share-capital topic, the premium collected on issue of shares/debentures is a capital profit credited to the Securities Premium Reserve Account. As per Schedule III of the Companies Act, 2013, it is disclosed as:
| Side | Head | Sub-head | Item | …
- CBSE 2024Set ANNUAL1 markMCQQ.Premium received on shares issued, is shown at(a) debit side of Profit & Loss A/c(b) liabilities side of Balance Sheet(c) assets side of Balance Sheet(d) credit side of Profit & Loss A/c
›Reveal solutionSolution
Premium on issue of shares is a capital receipt and is shown on the liabilities side of the Balance Sheet, under Reserves and Surplus, as "Securities Premium Reserve."
When a company issues shares at a premium (i.e. at a price above face value), the excess over face value is credited to a separate account called the Securities Premium Reserve (previously "Securities Premium Account"), governed by Section 52 of the Companies Act, 2013.
This amount:
- Is not credited to Profit & Loss A/c — it is a capital receipt, not trading income, so it never passes through the debit or credit side of the Profit & Loss Account.
- Is not shown on the assets side — it is not an asset of the company.
- Is shown under "Reserves and Surplus," under Shareholders' Funds, on the Equity and Liabilities (liabilities) side of the Balance Sheet prepared as per Schedule III of the Companies Act. …
- CBSE 2023Set ANNUAL1 markMCQQ.In which account the amount received over and above the nominal value of share should be credited?(a) Share Application Account(b) Share Allotted Account(c) Share Capital Account(d) Securities Premium Account
›Reveal solutionSolution
The excess of issue price over face value is premium, credited to the Securities Premium Account — answer (d).
This WBCHSE HS Accountancy MCQ tests where share premium is recorded.
When a share of face value (say ₹ 10) is issued above par (say ₹ 12), the extra ₹ 2 is a securities premium. Under Section 52 of the Companies Act, 2013 it must be credited to a separate Securities Premium Account (a capital reserve) and can be used only for specified purposes (issuing bonus shares, writing off preliminary expenses/disco …
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