F1 1.05 Share capital and share premium

Share capital

A company’s share capital forms part of a company’s equity (i.e. the money the owners have tied up in the company). Share capital is calculated as follows:

Nominal Value of the Share multiplied by the Number of Shares in Issue

For example, let’s say that a company has 2,000 Ordinary A shares of £10 each in issue as well as 400 Ordinary B shares of £0.60 in issue. The company’s share capital would be as follows:

A company’s share capital will change when new shares are issued. For example, let’s say that a company’s share capital at the start of a year was £400,000, being 100,000 ordinary shares of £4 each. During the year, the company issued a further 50,000 ordinary shares of £4 each. The money received from the shareholders was banked and would be posted to the company’s general ledger as follows:

• Debit Bank account £200,000
• Credit Share capital £200,000

Its share capital at the end of the year will therefore be as follows:

Share premium

When a company issues new shares it might issue them at a premium, that is, a higher price than their nominal price. Companies do this where the market price of their shares is higher than their nominal price. If a company issues ordinary shares of £1 at a premium of £0.50 per share this means that the company will receive £1.50 per share (i.e. £1 + £0.50) from the issue.

By issuing shares at a higher market value rather than their nominal value, a company seeks to ensure that existing shareholders don’t lose out from the share issue and that the new shareholders pay a fair price for their shares.

Calculating share premium

When a company issues shares at a premium it will split the money to be received from the share issue between Share Capital and Share Premium.

The Share Capital will be calculated as normal, that is, the nominal price of the shares multiplied by the number of shares issued.

The Share Premium is the difference between the amount to be received from the share issue and the increase in share capital from the share issue. Alternatively, it can be calculated as the premium per share (i.e. the issue price per share less the nominal price per share) multiplied by the number of shares issued. Share premium forms part of a company’s equity.

Illustration

At the start of the year a company had 100 Ordinary shares of £100 each in issue. Its share capital was therefore £10,000 (i.e. 100 x £100).

During the year the company issued a further 20 shares at a price of £2,000 each. The proceeds were banked.

• The amount received from the share issue was therefore £40,000 (i.e. 20 x £2,000)
• The company’s share capital increased by £2,000 (i.e. 20 x £100)
• The company’s share premium increased by £38,000 (i.e. the amount received of £40,000 less the amount classed as an increase to its share capital of £2,000
  • Alternatively, the share premium can be calculated as the issue price per share of £2,000 less the nominal price per share of £100, or £1,900 multiplied by the 20 shares issued

The share issue would be recorded in the general ledger using the following postings:

• Debit Bank account £40,000
• Credit Share capital £2,000
• Credit Share premium £38,000