When the company allots shares for the first time these shares can be issued at their nominal price or above or below such a nominal price. The accounting for shares issued at premium and shares issued at discount varies a little. So let us see these accounting treatments and also look at the securities premium account in some detail.
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When the company decides to issue shares at a price higher than the nominal value or face value we call it shares issued at a premium. It is quite a common practice especially when the company has a great track record and strong financial performances and standing in the market.
So say the face value of a share is Rs 100/- and the company issues it at Rs 110/-. The share is said to have been issued at a 10% premium. The premium will not make a part of the Share Capital account but will be reflected in a special account known as the Securities Premium Account.
Now, this amount of premium can be called up by the company at any given time, i.e. with any call. The general norm is to collect the premium with either allotment or application money, rarely with call money. The premium amount as we discussed is credited to the Securities Premium Account. This account is found under the heading of Reserves and Surplus on the liabilities side of the Balance Sheet.
Securities Premium Account
Now according to the Companies Act 2013, there are some laws about the utilization of the Securities Premium Account. It states the specific purposes for which this balance may be used. So the account can only be used for such specific purposes and no other purpose.
- To issue fully paid-up bonus shares to its existing shareholders. However, you cannot exceed the limit of the unissued share capital of the company.
- Securities Premium Account can be used for writing off any preliminary expenses of the company.
- To write off expenses of issue of shares and debentures, such as commission paid or discount given on the issue of shares.
- The balance can also be used to provide for the premium that is payable on the redemption of debentures or of preference shares of the company.
- And finally, it can be utilized by the company to buy back its own shares.
The accounting treatment for shares issued at a premium will differ slightly than those issued at par. Let us see some journal entries for the same.
- Features of a Company, Kinds of Company and Share Capital of a Company
- Nature and Classes of Shares and Issue of Shares
- Shares Issued at Par
- Forfeiture of Shares
When Premium is received with Application money
If the premium amount is called and received with the application money we do not credit it directly to the Securities Premium A/c. The application is received but it could be rejected as well, so we wait until the application is accepted and finalized. The entries will be as follows
| Particulars | Amount | Amount | |
| Bank A/c | Dr | xxx | |
| To Share Application A/c | xxx | ||
| (Being share application money received) |
| Particulars | Amount | Amount | |
| Share Application A/c | Dr | xxx | |
| To Share Capital A/c | xxx | ||
| To Share Premium A/c | xxx | ||
| (Being application money transferred) |
When Premium is received with Allotment money
Sometimes the premium will be collected with the allotment money. In this case, the entries will be as follows
| Particulars | Amount | Amount | |
| Bank A/c | Dr | xxx | |
| To Share Allotment A/c | xxx | ||
| (Being share allotment money received) |
| Particulars | Amount | Amount | |
| Share Allotment A/c | Dr | xxx | |
| To Share Capital A/c | xxx | ||
| To Share Premium A/c | xxx | ||
| (Being application money transferred) |
One point to remember is if any advance money was received during the application, then such money may be adjusted towards the share allotment account. However, first the advance should be adjusted against the nominal value of the shares, and if still balance is left then be adjusted against the securities premium account.
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Solved Example for You
Q; ABC and Company issued 1000 shares of Rs 10/- each at Rs 12/-. The money was payable as per the following schedule.
- On Application Rs 2/-
- Allotment Rs 5/- (including premium)
- Final Call Rs 5/-
Applications were received for 2000 shares. 1000 applications were rejected and the money was refunded. There were no calls-in-arrears or calls-in-advance. Pass the journal entries for the same in the books of ABC and Company.
Solution:
In the books of ABC & Co,
| Particulars | Amount | Amount | |
| Bank A/c | Dr | 4000 | |
| To Share Application A/c | 4000 | ||
| (Being share application money Rs 2 received for 2000 shares ) |
| Particulars | Amount | Amount | |
| Share Application A/c | Dr | 4000 | |
| To Share Capital A/c | 2000 | ||
| To Bank A/c | 2000 | ||
| (Being share application money for 1000 shares transferred to the capital account and for 1000 shares refunded) |
| Particulars | Amount | Amount | |
| Bank A/c | Dr | 5000 | |
| To Share Allotment A/c | 5000 | ||
| (Being share allotment money received @ Rs 5 per share for 1000 shares) |
| Particulars | Amount | Amount | |
| Share Allotment A/c | Dr | 5000 | |
| To Share Capital A/c | 3000 | ||
| To Share Premium A/c | 2000 | ||
| (Being application money transferred to Share Capital Account @ Rs 3 per share and to Securities Premium A/c @ Rs 2 per share) |
| Particulars | Amount | Amount | |
| Bank A/c | Dr | 5000 | |
| To Final Call A/c | 5000 | ||
| (Being share call money received @ Rs 5 per share for 1000 shares) |
| Particulars | Amount | Amount | |
| Final Call A/c | Dr | 5000 | |
| To Share Capital A/c | 5000 | ||
| (Being application money transferred to Share Capital Account @ Rs 5 per share) |
