Company’s capital consists of shares that can be utilised to earn more capital for the company. Public companies issue shares to the public so that they can subscribe to their share capital while private companies opt for initial public offering or IPO to offer shares to the public.
Companies can issue shares at face value of the share, while there is an option for issue of shares at a value which is more than the face value/par value or nominal value of the shares. Such type of share issue is known as issue of shares at premium.
The difference between the face value/par value or nominal value of shares and the price of shares issued at premium is the premium amount.
It is generally issued by companies that have an excellent financial record, are well managed and have a great reputation in the market.
The profit earned from the issuance of shares at premium is called as capital profit and is credited to a separate account which is known as the Securities Premium Account.
The company has the option to call the premium amount anytime without any call. The general rule that is followed is to collect the premium along with the application or at the time of allotment, but rarely at the time of call money. The most preferred method is to collect the premium at the time of share allotment.
What is a Securities Premium Account?
Shares are generally issued at par or their nominal value, but sometimes the shares are issued at an amount that is higher than the par value or the nominal value, such instance of issuing shares is known as shares issued at premium.
The premium amount or the amount in excess of par value which is obtained by issuing of shares is credited to a separate account and that account is called as the securities premium account. It is shown under the head Reserves and Surplus on the liabilities side of a company’s balance sheet.
Provisions for Security Premium
There are certain restrictions on how the securities premium can be used and accordingly there are provisions which are mentioned in section 52 of the Companies Act, 2013. These provisions are:
- By issuing fully paid bonus shares to the company members (shareholders).
- By providing for the premium payable which is paid on redemption of any redeemable preference shares or debentures.
- By writing off the preliminary expenses of the company
- By writing off the expenses incurred on issue of shares and debentures, the expenses such as discount allowed or commission paid for issuing the shares.
- By using it to buy back own shares.
Accounting treatment for Shares issued at premium
There is a very subtle difference between the accounting treatment for shares issued at premium and shares issued at par. Let us look at the following cases.
1) Premium is received with application money
In case the premium amount is received along with the application money, it will not be directly credited to the securities premium account, as there is a chance that the application can get rejected. The following entries can be seen
2) Premium received with allotment money
When premium is collected with the allotment money, the following entries will be created.
Any amount which will be paid in advance during the process of application will be adjusted towards the share allotment account. However the general rule is to first adjust the advance against the shares nominal value and then the remaining amount (if any) will be adjusted against the securities premium account.
This article was all about the concept of issue of shares at premium which is an option available for companies when they offer shares to the public. Students will find this easy to understand and it will help them in developing their knowledge. For more such insightful articles, stay tuned to BYJU’S.