Accounting mechanics for the Issue of Equity and Preference Shares at Par and Premium
by Issue of shares is a process through which a company raises capital by offering ownership units to investors. Shares are generally classified into equity shares and preference shares. Equity shareholders usually enjoy voting rights and participate in the company’s profits, while preference shareholders receive preferential rights regarding dividends and repayment of capital, subject to the terms of issue. Shares may be issued at par or at a premium. The accounting process involves recording application money, allotment money, call money, and the appropriate amounts under Share Capital and Securities Premium Accounts.
1. Issue of Shares at Par
Shares are issued at par when their issue price equals their nominal or face value. For example, if a company issues shares with a face value of ₹10 for ₹10 each, the shares are issued at par. The amount received is credited to the Share Capital Account, and no securities premium arises. Payment may be collected in one instalment or in stages, such as application, allotment, and calls. The accounting entries depend on the payment schedule. Issuing shares at par provides the company with funds while maintaining the nominal value of its share capital.
Example: A company issues 10,000 equity shares of ₹10 each at par, payable in full on application.
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Bank A/c Dr. | 1,00,000 | — |
| To Equity Share Capital A/c | — | 1,00,000 |
| (Being 10,000 equity shares of ₹10 each issued at par and fully paid) |
2. Issue of Shares at Premium
Shares are issued at a premium when the issue price exceeds their face value. The difference between the issue price and the nominal value is called securities premium. For example, if a share with a face value of ₹10 is issued for ₹12, the premium is ₹2 per share. The face value is credited to the Share Capital Account, while the premium is credited to the Securities Premium Account. This method enables a company to raise additional funds without increasing the nominal value of its share capital. The premium must be accounted for according to applicable company law.
Example: A company issues 10,000 equity shares of ₹10 each at ₹12 per share, receiving the full amount immediately.
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Bank A/c Dr. | 1,20,000 | — |
| To Equity Share Capital A/c | — | 1,00,000 |
| To Securities Premium A/c | — | 20,000 |
| (Being equity shares issued at a premium of ₹2 per share) |
3. Issue of Equity Shares at Par
Equity shares represent ownership in a company and generally carry voting rights. When issued at par, the company receives an amount equal to the face value of each share. The amount is credited to Equity Share Capital. If the payment is collected through application, allotment, and calls, the company records the amount due at each stage and subsequently records its receipt. This approach distinguishes amounts demanded from shareholders from amounts actually collected and helps maintain accurate financial records.
Example: ABC Limited issues 5,000 equity shares of ₹10 each at par, payable ₹3 on application, ₹4 on allotment, and ₹3 on the final call.
Journal Entries
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Bank A/c Dr. | 15,000 | — |
| To Equity Share Application A/c | — | 15,000 |
| Equity Share Application A/c Dr. | 15,000 | — |
| To Equity Share Capital A/c | — | 15,000 |
| Equity Share Allotment A/c Dr. | 20,000 | — |
| To Equity Share Capital A/c | — | 20,000 |
| Bank A/c Dr. | 20,000 | — |
| To Equity Share Allotment A/c | — | 20,000 |
| Equity Share Final Call A/c Dr. | 15,000 | — |
| To Equity Share Capital A/c | — | 15,000 |
| Bank A/c Dr. | 15,000 | — |
| To Equity Share Final Call A/c | — | 15,000 |
The total share capital raised is ₹50,000.
4. Issue of Equity Shares at Premium
When equity shares are issued above their face value, the company divides the amount received between Equity Share Capital and Securities Premium. The face value is credited to Equity Share Capital, while the excess amount is credited to Securities Premium. Depending on the issue terms, the premium may become payable on application, allotment, or a call. The company must record the premium when it becomes due and account for its receipt appropriately.
Example: A company issues 4,000 equity shares of ₹10 each at ₹15 per share, payable in full on allotment.
Calculation:
-
Share capital: 4,000 × ₹10 = ₹40,000
-
Securities premium: 4,000 × ₹5 = ₹20,000
-
Total amount received: ₹60,000
Journal Entry
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Bank A/c Dr. | 60,000 | — |
| To Equity Share Capital A/c | — | 40,000 |
| To Securities Premium A/c | — | 20,000 |
| (Being equity shares issued at ₹15 each, including ₹5 premium) |
5. Issue of Preference Shares at Par
Preference shares generally provide preferential rights concerning dividends and repayment of capital during winding up, according to their terms and applicable law. When preference shares are issued at par, their issue price equals their face value. The amount received is credited to Preference Share Capital. These shares may carry a fixed dividend rate and may be redeemable, subject to the terms of issue and legal requirements. The company must clearly record the amount received and the class of shares issued.
Example: A company issues 2,000 preference shares of ₹100 each at par, fully paid in cash.
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Bank A/c Dr. | 2,00,000 | — |
| To Preference Share Capital A/c | — | 2,00,000 |
| (Being 2,000 preference shares of ₹100 each issued at par) |
6. Issue of Preference Shares at Premium
Preference shares are issued at a premium when their issue price exceeds their face value. The face value is credited to Preference Share Capital, and the additional amount is credited to Securities Premium. The premium forms part of the company’s equity or other relevant capital-related balance, according to the applicable reporting framework. It must be recorded separately and cannot be treated as unrestricted revenue income. This method enables the company to raise additional funds through preference shares.
Example: A company issues 1,000 preference shares of ₹100 each at ₹110 per share.
Calculation:
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Preference share capital: 1,000 × ₹100 = ₹1,00,000
-
Securities premium: 1,000 × ₹10 = ₹10,000
-
Total proceeds: ₹1,10,000
Journal Entry
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Bank A/c Dr. | 1,10,000 | — |
| To Preference Share Capital A/c | — | 1,00,000 |
| To Securities Premium A/c | — | 10,000 |
| (Being preference shares issued at a premium of ₹10 per share) |
7. Accounting Treatment of Securities Premium
Securities premium represents the excess of the issue price over the face value of shares. It is credited to the Securities Premium Account and recorded separately from share capital. Under Section 52 of the Companies Act, 2013, the balance may be used only for specified purposes, subject to applicable provisions. These include issuing fully paid bonus shares, writing off permitted preliminary expenses and certain issue-related expenses, providing for premiums payable on redemption of specified securities, and purchasing the company’s own shares or other securities as permitted by law. Proper accounting ensures compliance and transparency.
8. Presentation in the Balance Sheet
Share capital and securities premium are presented separately in the company’s financial statements under the applicable reporting format. The nominal value of issued shares forms part of share capital, whereas the premium collected is disclosed separately under the relevant equity heading. This classification helps shareholders, creditors, investors, and regulators understand the company’s capital position. Accurate disclosure also assists in evaluating ownership financing, changes in equity, and the company’s ability to raise further capital. The presentation must comply with the applicable accounting standards and statutory requirements.
Importance of Proper Accounting Mechanics
1. Accuracy of Financial Records
Proper accounting mechanics ensure that all transactions relating to the issue of equity and preference shares are recorded accurately. The amounts received through application, allotment, and calls must be entered in the correct accounts. The face value of shares is credited to Share Capital, while any excess amount is credited to Securities Premium. Accurate recording reduces errors, prevents misclassification, and ensures that the company’s financial records reflect the correct amount of capital raised.
2. Compliance with Legal Requirements
Proper accounting helps companies comply with the Companies Act, 2013, applicable accounting standards, and other statutory requirements. Companies must follow the prescribed procedures for issuing shares, collecting payments, maintaining records, and using securities premium. Correct accounting entries provide evidence that share issues have been recorded according to legal requirements. Compliance reduces the risk of penalties, disputes, and regulatory action while supporting transparent corporate administration and responsible financial management.
3. Correct Classification of Share Capital
Proper accounting mechanics ensure the correct classification of equity share capital, preference share capital, and securities premium. These accounts represent different components of a company’s financing structure and should not be combined incorrectly. For example, when shares with a face value of ₹10 are issued for ₹15, ₹10 is credited to Share Capital and ₹5 to Securities Premium. This distinction provides a clear understanding of the company’s nominal capital and the additional amount received from shareholders.
4. Prevention of Accounting Errors
A systematic accounting process helps prevent errors in calculations, journal entries, posting, and reconciliation. Separate recording of application money, allotment money, and call money makes it easier to identify discrepancies between amounts due and amounts received. It also helps detect incorrect entries, duplicate receipts, and unpaid amounts. By maintaining proper documentation and reviewing transactions regularly, companies can improve the reliability of their accounts and reduce the possibility of financial misstatements.
5. Transparency in Financial Reporting
Proper accounting mechanics promote transparency by ensuring that share capital and securities premium are presented appropriately in financial statements. Investors and other stakeholders can understand the company’s ownership financing, the amount of capital issued, and the additional funds received above face value. Clear financial reporting makes it easier to compare financial information across periods and evaluate changes in the company’s capital structure. Transparency also strengthens accountability and supports informed decisions by shareholders, creditors, and potential investors.
6. Facilitation of Auditing
Accurate accounting records make the auditing process more efficient and reliable. Auditors can examine share application forms, allotment records, bank statements, share registers, and journal entries to verify the issue and receipt of share capital. Proper documentation helps establish whether transactions have been authorised and recorded correctly. It also enables auditors to identify irregularities, omissions, and inconsistencies. Therefore, systematic accounting improves audit readiness and strengthens the company’s internal control and financial reporting systems.
7. Protection of Shareholders’ Interests
Proper accounting protects shareholders by ensuring that their investments and related rights are recorded correctly. The number of shares issued, amounts paid, outstanding calls, and applicable share categories must be properly maintained. Accurate records help prevent disputes regarding ownership, payment obligations, and entitlement to dividends or voting rights. They also support fair treatment of shareholders and help management communicate reliable financial information. Consequently, proper accounting contributes to shareholder confidence and responsible corporate governance.
8. Support for Financial Planning and Decision-Making
Reliable accounting information helps management assess the funds raised through share issues and plan their future financial requirements. By understanding the amounts received as equity capital, preference share capital, and securities premium, management can evaluate available resources and make informed investment decisions. Accurate records also assist in budgeting, business expansion, working capital management, and capital restructuring. Thus, proper accounting mechanics provide a dependable financial foundation for planning, controlling resources, and achieving the company’s long-term objectives.