What is Issue of Shares at Premium Accounting?

S7-SA7-0843

Grade Level:

Class 12

AI/ML, Physics, Biotechnology, FinTech, EVs, Space Technology, Climate Science, Blockchain, Medicine, Engineering, Law, Economics

Definition

What is it?

When a company issues shares at a price higher than their face (nominal) value, it's called 'Issue of Shares at Premium'. The extra amount collected above the face value is the 'share premium'. Accounting for this involves recording both the face value and the premium separately.

Simple Example

Quick Example

Imagine a new chai stall opens and sells 'founder's chai coupons' for Rs. 12 each. The actual cost to make the chai (its face value) is Rs. 10. The extra Rs. 2 collected per coupon is like the 'premium' because people are willing to pay more for a new, popular stall. The stall owner records Rs. 10 for chai cost and Rs. 2 as extra income (premium).

Worked Example

Step-by-Step

Swadeshi Tech Ltd. issues 10,000 shares of Rs. 10 each at a premium of Rs. 2 per share. The full amount is payable on application. --- Step 1: Calculate total face value amount. 10,000 shares * Rs. 10 = Rs. 1,00,000. --- Step 2: Calculate total premium amount. 10,000 shares * Rs. 2 = Rs. 20,000. --- Step 3: Calculate total application money received. Rs. 1,00,000 (face value) + Rs. 20,000 (premium) = Rs. 1,20,000. --- Step 4: Pass journal entry for receiving application money. Bank A/c Dr. Rs. 1,20,000 To Share Application A/c Rs. 1,20,000 (Being application money received for 10,000 shares at Rs. 12 each) --- Step 5: Pass journal entry for allotment and premium. Share Application A/c Dr. Rs. 1,20,000 To Share Capital A/c Rs. 1,00,000 To Securities Premium Reserve A/c Rs. 20,000 (Being application money transferred to share capital and premium reserve).

Why It Matters

Understanding share premium is crucial for anyone interested in FinTech or Economics, as it shows how companies raise capital and are valued. Future lawyers need to know these rules, and even engineers in startups need to understand how their company's shares are valued. It's a key part of how successful businesses grow and fund big projects, from building EVs to launching satellites.

Common Mistakes

MISTAKE: Students often add the premium amount to the Share Capital Account. | CORRECTION: The premium amount should always be credited to a separate account called 'Securities Premium Reserve Account' and never to the Share Capital Account.

MISTAKE: Forgetting to mention 'Securities Premium Reserve' in the journal entry narration. | CORRECTION: The narration must clearly state that the premium amount is being transferred to the Securities Premium Reserve Account to ensure clarity and proper accounting.

MISTAKE: Calculating premium on issued shares that are later forfeited or reissued without adjustment. | CORRECTION: Premium is only collected once when shares are initially issued. If shares are forfeited, the premium already collected is not cancelled but remains in the Securities Premium Reserve.

Practice Questions

Try It Yourself

QUESTION: Bharat Dairy Ltd. issued 5,000 shares of Rs. 100 each at a premium of Rs. 10 per share. What is the total premium amount collected? | ANSWER: Total premium = 5,000 shares * Rs. 10 = Rs. 50,000.

QUESTION: A company issued 2,000 shares of Rs. 50 each at Rs. 60 per share. Pass the journal entry for the amount received on application if the full amount is payable on application. | ANSWER: Bank A/c Dr. Rs. 1,20,000 (2000 * 60) To Share Application A/c Rs. 1,20,000 (Being application money received for 2,000 shares at Rs. 60 each)

QUESTION: Desh Motors Ltd. issued 10,000 shares of Rs. 10 each at a premium of Rs. 3 per share. Rs. 5 (including premium) was payable on application, and the balance on allotment. Pass journal entries for application and allotment. | ANSWER: Application: Bank A/c Dr. Rs. 50,000 (10,000 * 5) To Share Application A/c Rs. 50,000. Share Application A/c Dr. Rs. 50,000 To Share Capital A/c Rs. 20,000 (10,000 * (5-3)) To Securities Premium Reserve A/c Rs. 30,000 (10,000 * 3). Allotment: Share Allotment A/c Dr. Rs. 80,000 (10,000 * 8) To Share Capital A/c Rs. 80,000 (Balance face value = 10 - 2 = 8. No premium on allotment here). Bank A/c Dr. Rs. 80,000 To Share Allotment A/c Rs. 80,000.

MCQ

Quick Quiz

Where is the premium received on issue of shares credited?

Share Capital Account

Profit and Loss Account

Securities Premium Reserve Account

General Reserve Account

The Correct Answer Is:

The premium collected above the face value of shares is a capital profit and, by law, must be credited to a separate account called 'Securities Premium Reserve Account'. It cannot go to Share Capital or Profit and Loss.

Real World Connection

In the Real World

When a successful Indian startup, like Zomato or Nykaa, goes public (Initial Public Offering - IPO), they often issue shares at a premium because many investors want to buy them. This premium helps the company raise more capital to expand, perhaps by hiring more AI engineers, developing new FinTech solutions, or expanding their delivery network across India, similar to how Flipkart or JioMart operate.

Key Vocabulary

Key Terms

FACE VALUE: The nominal or par value of a share, printed on the share certificate. | PREMIUM: The extra amount charged above the face value when shares are issued. | SECURITIES PREMIUM RESERVE: A special account where the premium amount collected on share issue is kept. | SHARE CAPITAL: The total amount of money a company has raised by issuing shares at their face value. | JOURNAL ENTRY: A record of financial transactions in accounting books.

What's Next

What to Learn Next

Now that you understand issuing shares at a premium, next you should explore 'Issue of Shares at Par and Discount' to see all possible scenarios. Then, dive into 'Forfeiture of Shares' to learn what happens if shareholders don't pay their dues, which builds directly on these concepts.