A premium stock account appears on the shareholders’ equity portion of the balance sheet. the share premium account represents the difference between the nominal value of the issued shares and the subscription or issue price. it is also known as additional paid-in capital and can be called paid-in capital in excess of face value. This account is a legal reserve account, one that is not distributable.
The share premium can be money received from the sale of common or preferred shares. A balance is recorded in this account only when there is a direct sale of company stock, usually from a capital increase or initial public offering. secondary trade, between investors, does not affect the premium account of shares.
Key findings
- The share premium is the credited difference in price between the par value or par value of the shares and the total price a company received for the recently issued shares.
- The amount credited to the stock premium account generally fluctuates from quarter to quarter as a company issues new shares at market value, rather than face value.
- The share premium cannot be used to distribute dividends or any other payment and can only be used for what has been expressly established in the company’s bylaws.
- A stock premium account appears in the shareholders’ equity section of the balance sheet.
Premium premium account example
Many companies issue shares at their face value, such as $ 0.01 per share, which means that many companies will have a premium account balance of shares.
For example, let’s say a company issues 1,000 shares at a par value of $ 0.01 per share. the company actually received $ 15 a share during an offering. The difference between the face value and the subscription amount is the share premium. Ten dollars is credited to the common stock account and the additional $ 14,990 is credited to the share premium or additional paid-in capital account.
A premium share account can be used to pay for certain expenses, such as subscription cost, fees paid, and certain discounts; the accounts can also be used to issue bonus shares.
Uses of Stock Premium Account Funds
The value of a stock premium account will likely change over time as a company issues new shares at market value rather than face value.
Funds in the stock premium account cannot be distributed as dividends and can only be used for the purposes outlined in company bylaws or other government documents. Often times, the share premium can be used to pay for capital issue expenses, such as subscription fees, or to issue bonus shares to shareholders.
Beyond selling shares above par, the share premium account can be credited if the government donates land to the company.
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share premium account
Such expenses that can be canceled include commissions paid and discounts allowed. Buybacks can also reduce this account. that is, if the sale price was less than the repurchase price, the difference is due to additional paid-in capital.
For example, a company buys 1,000 shares at $ 10 per share, where the par value is $ 0.01. The original price of the initial sale of this share was $ 5 per share. the transaction would be a $ 100 debit to common stock, a $ 4,900 debit to additional paid-in capital, and a $ 5,000 debit to retained earnings. Also, the $ 10,000 credit to the cash account used for the purchase.
Share premium and stockholders’ equity
The equity portion of the balance sheet shows the initial amount of money invested in the business. Net worth also lists retained earnings as the value of net earnings not paid as dividends.
Retained earnings are often used to pay off debt, reinvest in the business for research and development purposes, or for new business or equity acquisitions. A company’s net earnings, after taxes, and its retained earnings represent the company’s total net worth. If a net loss is greater than the retained earnings, there are negative retained earnings that are shown as a deficit.
The share premium, or additional paid-in capital account, and retained earnings are usually the two most important components of net worth. In terms of equity, the first account is usually the common stock account followed by the additional paid-in capital account. Other accounts that appear in the shareholders’ equity section of the balance sheet may include other accumulated comprehensive income, treasury stock, and unearned compensation.
