Securities Premium-Meaning,Examples,Accounting Treatment ,Utilizations (Commerce Achiever)

A share may be issued at an amount more than the face value. It is the case of issue of shares at premium. For Example – a share whose face value is Rs. 10 may be issued at Rs. 20. Here the premium is Rs. 10 per share.

According to Companies Act, the amount of premium comes under the head Securities Premium Account. Share Premium is a capital receipt.

Disclosure in the Balance Sheet

There is a separate securities premium account. Securities Premium appears on the liabilities side of Balance Sheet under the head Reserve and Surplus.

ACCOUNTING TREATMENT OF SECURITIES PREMIUM

Companies collect the amount of premium in the lump sum at the time of issuing a share. The accounting entry of share premium is as follows –

Share Application A/c    Dr………………………………………………………………………..

To Share Capital…………………………………………………………………………….

To Securities Premium……………………………………………………………………….

It is clearly observable from the above entry that Securities Premium Account is credited for the amount of premium due, that is, on the alloted shares. This signifies that amount of premium collected shall not be refunded in order to prevent the violation of Section 77A and 78.

SECURITIES PREMIUM EXAMPLE

XYZ Ltd. issued 10,000 shares of Rs. 10 each at a premium of Rs. 2 per share payable at the time of application. All the shares are fully subscribed. So, the journal entry will be –

First entry

Bank A/c   Dr…………………………………………………………………..1,20,000

To Share Application A/c …………………………………………………. 1,20,000

Second entry

Application A/c   Dr…………………………………………………………1,20,000

To Share Capital A/c……………………………………………………………1,00,000

To Securities Premium………………………………………………………….20,000

UTILIZATION OF SECURITIES PREMIUM

Section 77A and 78 of the Companies Act, restricts the use of amount collected in the form of Premium on securities for the following purpose:

1. Issuing Fully paid bonus shares to the share holders.
2. Writing off preliminary expenses of the company.
3. Writing off the expenses of, or the commission paid or discount allowed on any issue of securities or debentures of the company.
4. Providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company.
5. In purchasing its own shares that is in buy back of shares.