Accounting for Issue of Shares at Par, Premium, Discount

When a company issues shares, the accounting treatment varies depending on whether the shares are issued at par, premium, or discount. Let’s explore each of these methods in detail, including examples and accounting entries.

1. Issue of Shares at Par

When shares are issued at par, the nominal value (face value) of the share is the same as the price at which the shares are issued. For example, if a company issues 1,000 shares with a face value of ₹10 each, they will be sold to investors at ₹10 per share, meaning no premium or discount is applied.

Example:

• Number of Shares Issued: 1,000

• Face Value: ₹10 per share

• Issue Price: ₹10 per share

• Total Capital Raised: 1,000 shares × ₹10 = ₹10,000

Accounting Entry:

• Bank Account Debit ₹10,000

• Share Capital Account Credit ₹10,000

This reflects the cash received in exchange for shares issued at par.

2. Issue of Shares at Premium

When shares are issued at a premium, the price at which shares are sold is higher than their nominal (face) value. The excess amount received over the face value is known as the securities premium and is credited to a separate account called the Securities Premium Account.

Example:

• Number of Shares Issued: 1,000

• Face Value: ₹10 per share

• Issue Price: ₹15 per share (₹10 face value + ₹5 premium)

• Total Capital Raised: 1,000 shares × ₹15 = ₹15,000

• Premium Received: 1,000 shares × ₹5 = ₹5,000

Accounting Entry:

• Bank Account Debit ₹15,000

• Share Capital Account Credit ₹10,000

• Securities Premium Account Credit ₹5,000

The above entry records the receipt of cash from investors for both the face value and the premium.

3. Issue of Shares at Discount

When shares are issued at a discount, the price at which shares are sold is lower than their nominal (face) value. This results in the company receiving less money than the nominal value of the shares. In most jurisdictions, issuing shares at a discount is restricted and often requires specific approvals from regulatory authorities.

Example:

• Number of Shares Issued: 1,000

• Face Value: ₹10 per share

• Issue Price: ₹8 per share (₹10 face value – ₹2 discount)

• Total Capital Raised: 1,000 shares × ₹8 = ₹8,000

• Discount Given: 1,000 shares × ₹2 = ₹2,000

Accounting Entry:

• Bank Account Debit ₹8,000

• Share Capital Account Credit ₹10,000

• Discount on Issue of Shares Account Credit ₹2,000

The Discount on Issue of Shares account is a contra-equity account that reflects the reduction in the total capital raised from the issue of shares at a discount.

Summary of Accounting Entries for Share Issues