Page 19 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Accounting for Companies-I

Notes Accounting Treatment: When the amount of premium is to be paid along with application
money by a shareholder, entry will be:
Bank Account Dr. (with amount of application and premium)
To Share Application Account

When share are allotted, entry will be:
Share Application Account Dr.
To Share Capital Account
To Share Premium Account
When the entire amount of share premium is collected by the company on allotment or a call,
the company may adopt any one of the following two alternatives:
(A) (i) When allotment money is due with share premium –
Share Allotment account Dr.
To Share Capital Account
To Share Premium Account

(ii) When allotment money is received along with share premium
Bank account Dr.
To Share Allotment Account
In this method, share premium is being credited even before the premium is received in cash. If
any shareholder fails to pay the allotment money, the share premium will have to be debited at
the time when shares are forfeited. Therefore, it is disliked by some accountants. They adopt the
second alternative.
(B) In this method, the amount of share premium will be ignored at the time of passing the
entry for allotment money due. Share premium is recorded only at the time of actual
receipt of cash.
(i) When allotment money is due (without premium)
Share Allotment Account Dr. (only allotment money)
To Share Capital Account
(ii) When allotment money is received with premium
Bank account Dr.

To Share Allotment Account
To Share Premium Account
Considering the restrictions imposed by the Companies Act, there are some persons who doubt
the propriety of debiting share premium account for non-receipt of cash at the time of forfeiture.
Therefore, the second method is better in which share premium will be credited only when the
amount of share premium has actually been received in cash.

Example 3: Mars Co. Ltd. issued 1,00,000 shares of 10 each at a premium 2 per share,
the terms of payment per share were as follows:
3 on application
4 on allotment

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