Share premium account

The share premium account balances the difference between the par value of a company's shares and the amount that the company actually received for newly issued shares.

Suppose a company issues a 100 shares of £1 each, but is paid £3 per share. It then has £300 of equity capital. Only £100 of this is share capital. The rest is clearly of the same nature as the share capital in that it is funding raised from shareholders in return for their ownership of the company. It is shown on the balance sheet as part of shareholders' funds called the share premium account.

The share premium account is likely to grow and diminish over time as a company is likely to issue shares in line with the current market value of its shares, rather than the essentially arbitrary par value of the shares.

The share premium account is not distributable. It can be moved into distributable reserves only through a re-organisation of capital (specifically, a reduction of capital). This is the purpose of the share premium account: it keeps money raised by issuing shares separate from distributable reserves.