Share premium is the amount received by a company over the face value when issuing new shares. It arises when a company sells shares at a price higher than their face value due to good financial performance. The difference between the selling price and face value is the share premium. Share premium must be deposited in a securities premium account and can only be used for specific purposes like issuing bonus shares or writing off share issue expenses. Bonus shares are additional free shares given to existing shareholders from a company's reserves like retained earnings or securities premium. They increase share capital without raising new funds.

1. CA. Mandar Joshi

2. Share Premium
 Share premium is the amount received by a company over
and above the face value of its shares.
 Face value of a share is its value that is printed on the share
certificate.
 For example, face value of a Rs. 1 share is one Rupee. But
just because the value of share is printed Rs. 1 does not
necessarily mean that the share is worth only one Rupee
 If a company has a history of good financial performance, it
can sell its shares at a price higher than the face value of the
shares. This difference between the selling price and the face
value of a share is known as share premium.

3. Share Premium – continued
 It is important to note that share premium arises only
when the “company” sells the shares while issuing new
equity shares.
 It does not arise when the “investor” sells shares at a
price greater than face value.
 If a company issues a share whose face value is Rs. 1 at
a price of Rs. 2, the company earns a share premium of
Rs. 1. But subsequently if the investor sells the same
share to someone else at a price of Rs.4, no share
premium will be gained by the company. The investor will
benefit from this gain.

4. Utilisation & Accounting
Treatment of Share Premium
 Share premium is a non-distributable reserve
 The company can use it only for the purposes that
are defined in the bylaws of that company. It cannot
be used for purposes not defined in the company’s
laws
 Usually the companies are not allowed to use the
share premium for payment of dividends to the
shareholders and to set off the operating losses.

5. Utilsation of Share Premium Account according
to Corporate Laws
 Section 52 of Companies Act 2013 prescribes that where a
company issues share at premium, it should deposit such
amount of premium in an account called “Securities Premium
Account”.
 The amount deposited in Securities Premium Account may be
utilised for the purposes mentioned below:
 To issue bonus shares
 Writing off Preliminary Expenses
 Writing off the expenses of any issue of shares and debentures
 In providing for the premium payable on the redemption of any
redeemable preference shares or of any debentures of the
company
 For the buyback of shares

6. Securities Premium Account
 The sum of share premium which a company receives for all past transactions of its
equities would be disclosed as a separate note in the annual accounts.
 Illustration:
During the year ended 31st March 2014, 500 Ordinary Shares of Rs.1 each were
issued to ABC limited at a price of Rs.2 each. The amount received as consideration
in excess of the nominal value is shown in the share premium account and shall be
disclosed in the annual accounts as under:
Share Capital Account 31-Mar-14 31-Mar-13
Ordinary shares of Rs.1
each
2,000 1,500
Securities Premium
Account
500 0
Total 2,500 1,500

7. Bonus Shares
 Bonus shares are additional shares given to the current shareholders
without any additional cost, based upon the number of shares that a
shareholder owns.
 These are company's accumulated earnings which are not given out in the
form of dividends, but are converted into free shares.
 Companies issue bonus shares to encourage retail participation and
increase their equity base.
 When price per share of a company is high, it becomes difficult for new
investors to buy shares of that particular company.
 Increase in the number of shares reduces the price per share. But the
overall capital & net worth of the company remains the same even if bonus
shares are declared.

8. Advantages of Issue of Bonus Shares
 Shareholders get their undistributed profits as bonus
shares
 Issue of bonus shares keep the stakeholders happy.
 By issuing bonus shares, the company is able to
increase the morale and motivation level of the
stakeholders
 By issuing bonus shares, it increases the marketability
of the shares

9. Disadvantages of Issue of Bonus Shares
 The companies encourage speculative dealings in shares
by issuing bonus shares.
 Issue of bonus shares is a very lengthy process. It
requires the approval of SEBI & number of other
compliance which might delay in the issue of shares.

10. Procedure & Accounting Treatment for
issue of Bonus Shares
 Bonus shares can be issued by a company by utilising the balance in
the Free Reserves such as Profit & Loss Account, General Reserve
and other reserves such as Capital Reserve, Capital Redemption
Reserve and Securities Premium Reserve.
 Since the Bonus issue is made without any cost to the existing
shareholders, the company will be incurring the cost to issue the
Bonus Shares
 Issue of bonus shares is not made with the intension of generating
funds, but with the intension of making the shareholders happy and
increasing the share capital
 Thus, in this process, accounting is done only to transfer the
unutilised balance in Reserves to Share Capital Account, thereby
increasing the Share Capital.

11. Journal Entries for Issue of Bonus
Shares
 Upon the sanction of issue of bonus shares
 Debit Profit & Loss Account
 Debit General Reserve
 Debit Capital Reserve Account (To the extent Available in
Cash)
 Debit Securities Premium Account
 Credit Bonus to Shareholders Account
 Upon Issue of Share
 Debit Bonus to Shareholders Account
 Credit Share Capital Account

12. Journal Entries for Issue of Bonus
Shares
 Illustration
Following items appear on the Balance Sheet of ABC Limited as on 31st March 2014
Particulars Rs.
40,000 Equity Shares of Rs.10 each 4,00,000.00
Capital Reserve (including Rs.30,000 being profit on sale of machinery) 75,000.00
Capital Redemption Reserve 25,000.00
Securities Premium 30,000.00
General Reserve 1,05,000.00
Profit & Loss Account 50,000.00
The company decides to issue bonus shares in the ratio of 1 share for every 4 held.
Pass necessary journal entries.

13. Journal Entries for Issue of Bonus
Shares
Solution
Journal Entries in the Books of ABC Limited
L/F Dr. Cr.
Rs. Rs.
Capital Reserve 30,000.00
Capital Redemption Reserve 25,000.00
Securities Premium 30,000.00
General Reserve 15,000.00
To Bonus to Shareholders Account 1,00,000.00
(Bonus issue in the ratio of 1 for 4 held, by utilising various reserves as per board
resoluion dated….)
Calculation of number of bonus shares to be issued
Existing number of shares 40000
Ratio 1:4
Number of bonus shares to issue 40000 X 1
4
=10,000
Amount to be utilised @ Rs.10 per share 4,00,000.00
Bonus to Shareholders A/c 1,00,000.00
To Equity Share Capital Account 1,00,000.00
Balance Sheet Extract after issue of bonus shares
Particulars Rs.
50,000 Equity Shares of Rs.10 each 5,00,000.00
Capital Reserve (including Rs.30,000 being profit on sale of machinery) 45,000.00
General Reserve 90,000.00
Profit & Loss Account 50,000.00

14. Few Additional Concepts
 Capital Reserve: A type of account on a company's
balance sheet that is reserved for long-term capital
investment projects or any other large and anticipated
expense(s) that will be incurred in the future.
 Thus the utilisation of capital reserve is restricted for long
term projects by the articles of the association
 Capital redemption reserve: Capital Redemption Revere
is an reserve created when a company buys it owns
shares which reduces its share capital. This reserve is
not distributable to shareholders and can be used to pay
bonus shared issued.