What are the accounting entries for share premium?

Introduction

Share premium is an amount received by a company from investors in excess of the face value of the shares. The accounting treatment of share premium involves the use of different accounts in the companys books of accounts.

What is the meaning of Share Premium?

Share premium is the value paid by the investor to a company, over and above the face value of the shares. It represents the additional amount that shareholders pay over and above the nominal value of the shares. Share premium can arise in a variety of circumstances, including when a company is formed or when shares are issued to raise additional capital.

What is the Accounting Entry for Share Premium?

The accounting entry for share premium is as follows:

Debit: Share Premium Account

Credit: Bank Account (or share capital account)

The amount of premium received on the issue of shares is credited to the share premium account, while the corresponding amount is debited to the bank account (if funds are received) or to the share capital account (if shares are issued at a premium). The share premium account is a reserve account that can be used to absorb losses or for the purposes of capital reduction in accordance with the Companies Act.

Why is Share Premium Treated Separately?

Share premium is treated separately because it represents a capital surplus and not revenue. If it is treated as revenue, it would be subject to distribution as dividend, which is not the intent of the law.

Conclusion

Share premium is an important concept in accounting and finance. It represents the additional amount paid by shareholders over and above the nominal value of the shares and is treated separately in the companys books of accounts. By understanding the accounting entries for share premium, businesses can accurately record and manage their financial transactions related to this important aspect of corporate finance.