In case of equity markets, companies which have good reputation due to their past track record of earnings or dividends track record or good top management enjoys a premium over other companies and when it comes to raising capital from the market companies can capitalize on its good reputation by issuing equity shares at a premium to the public. Hence for example if the face value of the company’s share is $100 and company issues the shares in the market at $110 than $100 is the share capital of the company and $10 will be the share premium. In the books of accounts of the company, the company will pass the following journal entry for the recording of shares issued at a premium –
Entry for Shares Issued at Premium
Bank Account Dr
To Share Capital Account
To Share Premium Account
In the above journal entry, the bank account is debited as per accounting rule of debit what comes in and credit what goes out, here money is coming into the bank account of the company and that is the reason why bank account of the company is debited. While share capital account is a liability, since liability of the company is increasing share capital account will be credited and as far as share premium account is concerned it is a gain for the company and according to accounting principle of crediting all income and gains company will credit share premium account in the books of account of the company.
As far as balance sheet treatment of share premium is concerned, the amount of share premium received by the company will be shown in the liability side of the balance sheet under the head reserves and surplus, however company cannot use share premium account for paying of dividend or other miscellaneous expenses rather company can use share premium funds only for specific purposes like issuing bonus shares to shareholders or payment of underwriters fees while issuing equity shares and so on.