A share premium account shows up in the shareholders’ equity portion of the balance sheet. The share premium account represents the difference between the par value of the shares issued and the subscription or issue price. For example, say a company issued 1,000 shares at $10 par value per share. The company actually received $15 per share as the subscription price. The difference between the par value and the subscription amount is the share premium. Thus, the additional $5,000 is placed in the share premium account.
The value of a share premium account likely changes over time as a company issues new shares at the market value as opposed to the par value. The funds in the share premium account cannot be distributed as dividends and may only be used for purposes outlined in the company’s bylaws or other governing documents. Often, the share premium can be used to pay the expenses of issuing equity, such as underwriter fees, or for issuing bonus shares to shareholders.
The shareholders’ equity portion of the balance sheet represents the initial amount of money invested in the business. The shareholders’ equity also lists retained earnings as the amount of net earnings not paid out as dividends. Retained earnings are often used to pay off debt, reinvest back into the company for research and development purposes, or for new business or capital acquisitions. A company’s net earnings, after taxes, and its retained earnings represent the total net worth of the company. If a net loss is greater than the retained earnings, there are negative retained earnings shown as a deficit.