When the shares are issued at a price more than their face value or nominal value,  is said that the shares have been issued at a premium.

The Company Act 1956 does not place any restriction on issue of shares at a premium but the amount received, as premium has to be placed in a separate account called Shares Premium Account. Share Premium Account is also known as Securities Premium Account.

According to Indian Company Act 1956, the amount of security premium may be used only for the following purposes:

  1. To write off the preliminary expenses of the company.
  2. To write off the expenses, commission or discount allowed on issued of shares or debentures of the company.
  3. To provide for the premium payable on redemption of redeemable preference shares or debentures of the company.
  4. To issue fully paid bonus shares to the shareholders of the company.

Difference between premium received on shares and the premium received on issue of debentures

There is a basic difference between the premium received on issue of shares and the premium received on issue of debentures that in former case the premium can be utilized for above mentioned purposes only while in later case the premium can be utilized by company in any manner it likes.

Treatment of Share Premium Account in Final Accounts

Share Premium Account is shown in liabilities side of balance sheet.

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