Security premium is not an ordinary income of the company; therefore it is not credited into the profit and loss account. It is comes under the category of capital recipt. Security premium can be utilized in the following ways; to write off preliminary expenses if any to write off discount on issue of shares to issue bonus shares to provide for the premium payable on any redeemable preference shares of the company. Illustration 4.05 ABC Ltd. invited applications for 1000 shares of Rs.10 each at a premium of Rs.2 on 1st January, 2002. The payments to be made as follows: Rs.3 on application; Rs.5 on allotment (including premium); Rs.4 on 1st call The issue was fully subscribed and the amounts due on allotments and first call have been received. Pass necessary Journal Entries. Journal Entries Particulars Dr. Cr 1. Bank Account 3,000 Dr. 3,000 To Share Application Account (Application money on 1000 shares @Rs.2 per share) 2. Share Application Account 3,000 Dr 3,000 To Share Capital (Application money credited to capital Account Share Allotment Account 5,000 3. Dr. 3,000 To Share Capital 2,000 To Securities Premium (Share Allotment and securities premium credited to respective accounts) Bank Account 4. 5000 Dr. 5,000 To Share Allotment (Share allotment money collected) Share 1st Call Account 5. 4,000 Dr. 4,000 To Share Capital (Share 1st call amount @Rs.5 per share credited to capital)
Security premium is not an ordinary income of the company; therefore it is not credited into the profit and loss account. It is comes under the category of capital recipt. Security premium can be utilized in the following ways; to write off preliminary expenses if any to write off discount on issue of shares to issue bonus shares to provide for the premium payable on any redeemable preference shares of the company. Illustration 4.05 ABC Ltd. invited applications for 1000 shares of Rs.10 each at a premium of Rs.2 on 1st January, 2002. The payments to be made as follows: Rs.3 on application; Rs.5 on allotment (including premium); Rs.4 on 1st call The issue was fully subscribed and the amounts due on allotments and first call have been received. Pass necessary Journal Entries. Journal Entries Particulars Dr. Cr 1. Bank Account Dr. To Share Application Account (Application money on 1000 shares @Rs.2 per share) 3,000 3,000 2. Share Application Account Dr To Share Capital (Application money credited to capital Account 3,000 3,000 3. Share Allotment Account Dr. To Share Capital To Securities Premium (Share Allotment and securities premium credited to respective accounts) 5,000 3,000 2,000 4. Bank Account Dr. To Share Allotment (Share allotment money collected) 5000 5,000 5. Share 1st Call Account Dr. To Share Capital (Share 1st call amount @Rs.5 per share credited to capital) 4,000 4,000