A company needs capital to operate its business effectively. There are different ways a company can raise funds, one of which is through the issuance of shares. However, when a company raises its capital through shares, it can classify these shares into two: share capital and share premium. In this article, we will explore the difference between a share premium account and a share capital account, and how they operate in a business setting.
Share Capital
A share capital account is the amount of capital a company raises through the issuance of its shares at face value. Share capital is recorded in the equity section of the company’s balance sheet and represents the amount of capital shareholders have invested in exchange for shares. Par value is the face value of the shares, which is assigned by the company on issuance. Share capital or nominal value is the total amount of money a company has raised from the issued shares. In summary, share capital represents the shareholder ownership in the company and their contribution to the company’s capitalization.
Share premium is the additional amount that an investor pays for a share over the face value or par value of the share. It is also known as the premium value of shares, and it appears on the balance sheet of a company as a separate account. Share premium reflects the difference between the amount paid by the shareholder on the share and the face value of the share. Share premium is also part of the equity section of the balance sheet.
Capital Composition
The crucial difference between share capital and share premium is in their composition. Share capital is the nominal value of shares issued to shareholders by a company. Share premium, on the other hand, is the additional amount that investors pay over and above the nominal value of shares. Therefore, shareholders’ interest in the company determines the share capital, while the market value of the shares determines the share premium.
Repayment
Another difference is that share capital cannot be repaid by the company to the shareholders. Shareholders’ money in the share capital account remains in the company’s reserves and is utilized for necessary business expenses and investments. Share premium, however, can be repaid to shareholders, if the company, with shareholders’ approval, decides to do so.
Usage
Share capital account’s key use is funding specific business operations, such as acquisition, expansion, and maintenance of assets, among others. Share premium, on the other hand, is utilized as a reserve for the company. A company can use the share premium for several purposes, such as setting up business operations, repayment of debt, or issuance of bonus shares. Issuing bonus shares means that the company increases the number of shares without affecting its ownership structure.
Companies require capital to operate effectively, and share capital and share premium are essential sources of capital for a business. Share capital provides a permanent capital reserve, while share premium works as a reserve fund. The share capital indicates the portion of capital that shareholders have invested in the company in return for equity. This capital remains in the company as permanent capital and is not returned to shareholders unless the company is liquidated. In contrast, share premium is a way for companies to raise capital at a premium over share issue price and is used for any future equity financing.
In conclusion, the differences between a share premium account and share capital account lie in their composition, repayment, and usage. Share capital represents the capital that shareholders have invested in the company, while share premium is the amount investors pay above the face value of shares. Share capital is permanent, and shareholders’ money cannot be repaid, while share premium can be repaid with shareholders’ approval. Both share capital and share premium are essential capital sources for companies.
By Astrobulls research pvt ltd.