Issue of Shares at Premium: Accounting Entries
A unit of capital or an equal portion of the share capital of an organisation divided, whose ownership is evidenced by a share certificate is known as a Share. Simply put, shares are the denominations of the share capital of an organisation. For example, if the total capital of ABC Ltd. is ₹10,00,000 and is divided into 10,000 units of ₹100 each. Each unit of ₹100 will be called a share. To easily identify the shares, it is essential to give them numbers. The share of a company is moveable in nature and can be moved through the process stated by the Articles of Association of the Company.
According to Indian Companies Act, 2013, “Shares means shares in share capital of the company and includes stock except where the distinction between stock and share is expressed or implied.”
Issue of Shares at Premium:
Issue of Shares at Premium means to issue the shares for a value more than its face value per share. For example, if the face value of shares is ₹20 each and they are issued at ₹25 each, then it will be the Issue of Shares at a Premium of ₹5. There is no legal restriction on a company for the issue of shares at a premium. There is a separate account called Securities Premium Reserve Account, in which the amount of the premium is credited. It is so because the amount of premium received on the shares issued is not a revenue profit but a capital profit. This amount is shown separately in the Equity and Liabilities side of the Balance Sheet under the Reserves and Surplus head.
In accordance with the provisions of Companies (Amendment) Act, 1999, instead of using ‘Share Premium’, the term ‘Securities Premium’ has been used.
Utilisation of Securities Premium Account under Section 52 of the Indian Companies Act, 2013:
Even though there is no legal restriction on the issue of shares at premium; however, Section 52 of the Indian Companies Act, 2013 has laid down some specific purposes for which the amount of securities premium can be used. These are as follows:
- Writing off the preliminary expenses of the company.
- Writing off the expenses, commission or discount allowed on the issue of shares or debentures of the company.
- For issuing fully paid bonus shares to the shareholders of the company.
- For paying premium on redemption of redeemable preference shares or debentures of the company.
- For buying back its own shares (as per Section 68).
Presentation of Security Premium in Company’s Balance Sheet:
Notes to Accounts:
Accounting Entries for the Amount of Premium:
The company may charge the premium either on application or on allotment or call. Therefore, it is essential to record premium at the time it is payable. The entries for the same will be as follows:
1. When the Premium amount is received on Application Money:
A. For receiving Application Money:
B. For transferring Application Money to Share Capital A/c and Securities Premium A/c:
2. When the Premium amount is received or receivable along with Allotment Money:
A. When the allotment money is due including premium:
B. When the allotment money is received along with premium:
3. If the Premium is received or receivable with Call Money:
A. When the call money is due along with premium:
B. When the call money is received along with premium:
Illustration 1 (When Premium is received on Application):
Sukant Ltd. issued 20,000 shares of ₹10 each with 10% premium, payable ₹5 on Application (including premium), ₹3 on Allotment and balance on Final Call. All money was received. Pass the Journal entries in the books of Sukant Ltd.
The amount payable will be as follows:
Illustration 2 (When Premium is received on Allotment and Call):
Sayeba Ltd. issued 50,000 shares @ ₹10 each at a premium of ₹4 per share payable as follows:
₹3 per share on Application
₹5 per share on Allotment (including ₹2 as premium)
₹3 per share on First Call (including ₹2 as premium)
₹3 per share on Second & Final Call
The issue was fully subscribed and money was duly received. Pass Journal Entries.
The amount payable will be as follows:
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