What is Securities Premium Account? and what are its utilizations?

1.   Here “Securities” means shares, debentures, bond etc. Listen! There is a difference between share premium and security premium. If I am saying share premium, it means I’m taking only equity and preference shares and on the other hand, security premium contains bonds and debentures also apart from shares. So security concept is a broad concept than share concept. Now, “Premium” means amount more than the face value of securities. Face value may be of 100, 10, 5, or even 1 Rupees/dollar.

If the company issues the securities more than face value, the excess of the amount over face value will be treated as premium and this premium is a reserve which is shown in balance sheet under the head “Reserve and Surplus” with the name “Security Premium Account” 

Suppose, a limited company with a face value of Rs10 issues 100000shares at a premium of Rs2. The journal entry would be:

Bank a/c      debit 1200000 (money received)

  To Equity Share Capital a/c 1000000(face value)

  To Security Premium a/c 200000(excess of the amount over face value)

The same rule will be applied for debentures and bonds.

But the question is why any company is going to issue its shares in premium?  

The answer is the management of that company believes that his company is doing good business and worth more than its face value. 

Is it profitable for the company? 

Yes! Definitely, the company is getting cash more than its face value so it’s a good sign for the company.

Is it profitable for the company if it issues debentures at a premium?

 Again the answer is Yes, Sure! Because, the company is getting more money than the money it will have to pay at the time of redemption of debentures.

Curious readers never stops to ask questions, their last question is –

What if company redeems its debentures at premium?

 Answer is –loss for the company because that company has to pay more than what it took at the time of issue of debentures. And the amount credited in the security premium account (if any) will be utilized first, to cover up this loss. (see point 4 below)

Now learn some more utilization of security premium account.

Utilization of security premium account-:

Sec 78 of the company act 1956, directs us to utilize the security premium account for the following purposes:

1.       Issuing fully paid bonus shares.

2.       Writing off Preliminary Expenses.

3.       Writing off the expense of or the commission paid or discount allowed on any issue of shares or debentures of the company.

4.       Providing for the premium payable on the redemption of preference shares or debentures of the company.

5.       In purchasing its own shares that is, Buy Back u/s 77A.

This was how I explained the above concept, hope you like it.If you have any question regarding this topic please feel free to ask in below mention comment box.