Share Premium

Where a company has in issue shares or debentures that are redeemable (ie when they were issued, the company specified that, at some (probably) specified date in the future, these instruments would be redeemed (bought back by the company), it’s possible that the terms of issue also specified that, on that redemption, the company would pay an amount in excess of the face value of the shares or debentures

That excess amount is referred to as the premium (payable on the redemption of shares or debentures)

When accounting for the redemption in double entry, the steps would be:

Dr Redeemable preference shares account
Cr Redemption of redeemable preference shares account
Setting up the nominal value of the liability

Dr Share premium account
Cr Redemption of redeemable preference shares account
Providing for the premium payable on the redemption

Dr Redemption of redeemable preference shares account
Cr Cash
Paying the money to buy back those redeemable preference shares

Is that clearer?

Yes – I suppose that’s a bit like a bank overdraft except with preference shares and debentures the company dictates the terms of issue and redemption whereas, once the bank has its claws into you, you’re at their mercy

OK?