Treatment of security premium

Under Section 78 of the Act, Securities Premium Reserve may be used wholly or in part for:

(a) Issuing fully paid bonus shares to the members.

(b) Writing off preliminary expenses.

(c) Writing off the expenses of or the commission paid or discount allowed on any issue of shares or debentures of the company.

(d) Providing for the premium payable on the redemption of preference shares or debentures of the company.

(e) In purchasing its own shares i.e. Buy Back u/s 77 A

It is to be noted here that any utilization of the amount of premium except in any of the modes specified above, can only be done by way of reduction of capital and this will require the compliance of the provisions laid down in Section 100 of the Act.

Accounting Treatment:

Securities Premium Reserve may be demanded by company on application, allotment or calls.

In case it is received by the company on application, then the following treatment is followed:

(1) When Premium is received on application:

(i) Bank A/c ….Dr. (With the App. Money & Securities Premium)

To Share Application A/c

(ii) Share Application A/c ….Dr.

To Share Capital A/c

To Securities Premium Reserve A/c

(Being the application money transferred to share capital and securities premium account)

Note:

Students should note that Securities Premium Reserve Account is not credited when the application money is received. It is due to the reason that at the time of receiving the application money it is treated as deposit and the company is not certain whether the amount received would be accepted or rejected.

(2) When Premium is received on allotment:

Securities Premium Reserve Account is credited with Full Amount at the Time of Making the Allotment Due:

(i) Share Allotment A/c …Dr. (With the amount of allotment and Securities Premium)

To Share Capital A/c

To Securities Premium Reserve A/c

(ii) For Allotment (including premium) Received:

Bank A/c … Dr.

To Share Allotment A/c

It is important to note that surplus application money retained for allotment should first be applied towards the adjustment of nominal value of allotment money and the balance, if any, will be adjusted towards securities premium payable.