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3.1 The share premium account 

In this context, 'premium' means the difference between the issue price of the share and its par value. 

The account is sometimes called 'capital paid-up in excess of par value'. When a company is first 

incorporated (set up) the issue price of its shares will probably be the same as their par value and so 

there would be no share premium. If the company does well, the market value of its shares will increase, 

but not the par value. The price of any new shares issued will be approximately their market value.  

The difference between cash received by the company and the par value of the new shares issued is 

transferred to the share premium account. For example, if X Co issues 1,000 $1 ordinary shares at 

$2.60 each the book entry will be: 

 

 

$ 

$   

DEBIT Cash 

2,600 

 

CREDIT Ordinary 

shares 

 

1,000 

 

Share premium account 

 

1,600 

A share premium account only comes into being when a company issues shares at a price in excess of 

their par value. The market price of the shares, once they have been issued, has no bearing at all on the 

company's accounts, and so if their market price goes up or down, the share premium account would 

remain unaltered. 

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