Glossary
Share premium
The extra a company charges for shares above their nominal value.
What it means
The excess of the issue price of shares over their nominal value, recorded in a share premium account within equity.
Example
Shares of RM1 nominal value issued at RM1.50 raise a share premium of 50 sen each.
Why it matters
It is part of shareholders' funds and is a capital reserve that cannot be paid out as a normal dividend.
In practice
Share premium arises only in a limited company. It is recorded when shares are issued for more than their nominal (face) value. The excess is credited to a share premium account, which sits in the capital and reserves section of the statement of financial position, separate from ordinary share capital.
If a company issues 10,000 shares of RM1 nominal value at RM1.30 each, RM10,000 goes to share capital and the extra RM3,000 goes to share premium. It is a capital reserve, so it cannot be used to pay ordinary cash dividends. Its uses are limited to purposes such as issuing bonus shares.
Do not confuse share premium with retained earnings or a general reserve. Those are revenue reserves built from trading profits, and they are available for dividends. Share premium is not a profit of any kind. It shows that investors were willing to pay above face value, usually because the company is already well established. It never passes through the income statement.
If share issues and reserves are new to you, one of our teachers can take you through the entries with simple numbers first. Book a trial class.
Related terms
Definitions here are general accounting explanations for study. For your board's exact wording, see its official syllabus via Sources.
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