In the earlier blog, we looked at the various types of reserves. In today's blog we look at Share Premium (or Securities Premium)
The Share premium account is used to balance the difference between the par value of the company's share and the amount that the company actually receives for the new issue of shares.
An example would make it clear. If the company issues 1000 shares of Rs 10 each, but gets Rs 15 per share, then we get Rs 15000 as equity capital only 10000 of this is the share capital. The remaining excess capital is really similar to the share capital in that it was raised in return for the ownership of the company. This is shown in the balance sheet as Share Premium account.
Given that this was raised in addition to the share capital, it cannot be returned to the shareholders. It can be utilized for the following purpose:
- Issuing fully paid bonus shares
- Writing off the preliminary expenses of the company
- Writing off the expenses of, or the commission paid or discount allowed on, an issue of shares or debentures of the company
- Providing for the premium payable on redemption of redeemable preference shares or debentures of the company.
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