can the money received as securities premium be used to buy assets or pay off business expenses of the Company?

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  1. A Company issues 100,000 equity shares of Rs.10/- each at a premium of Rs.1/-. The entry in the books of account will be as follows:

 

Bank A/c     Dr.  Rs. 11,00,000/-

To Share Capital Account                           Rs. 10,00,000

To Securities Premium Account                  Rs.100,000/-

 

And the balance sheet will show the following picture

Liabilities

Amount (in Rs.)

Assets

Amount (in Rs.)

Equity Share Capital

10,00,000

Bank Account

11,00,000

Securities Premium Account

1,00,000

Other Assets

Xxxxxxx

Total

11,00,000

 

11,00,000

 

Now, the Company A wishes to purchase plant of Rs. 100,000 and in that case the entry in the books of accounts will be as follows:

 

Plant & Machinery A/c  Dr. Rs.1,00,000

To Bank A/c                                                           Rs.1,00,000

 

Post this transaction the Balance sheet of the Company A will show this picture:

 

Liabilities

Amount (in Rs.)

Assets

Amount (in Rs.)

Equity Share Capital

10,00,000

Bank Account

10,00,000

Securities Premium Account

1,00,000

Plant & Machinery

1,00,000

Total

11,00,000

 

11,00,000

 

Is the above treatment valid?

Please provide any case laws/judgements to support the same.

Thanks and Regards

Sakshi Vaid

 

asked Sep 12, 2013 by cssakshivaid (120 points)

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