Premium on common stock definition
/What is the Premium on Common Stock?
The premium on common stock is the difference between the par value of a share of stock and the price at which a business sells the share to investors. Par value is the face value printed on a stock certificate; it is usually quite small, with $0.01 per share being a common amount. For example, if ABC Company sells a share of common stock to an investor for $10, and the stock has a par value of $0.01, then the premium on common stock is $9.99.
This premium is rarely recorded in an account having that name. Instead, it is more commonly recorded in an account called Paid-In Capital In Excess of Par Value. It may also be recorded in an account called Additional Paid-In Capital. The account appears in the shareholders' equity section of the balance sheet. It does not appear in the income statement. A sample balance sheet that includes the additional paid-in capital line item appears in the following exhibit.
When shares are traded between investors in the after-market (such as on a stock exchange), there is no impact on the issuing entity, since it is not participating in the trades. Therefore, when someone pays a premium for common stock on a stock exchange, the issuing entity does not make an entry in its accounting records to reflect the increased premium on common stock.
Related AccountingTools Courses
Premium on Common Stock FAQs
Can premium on common stock be used for dividends?
Sometimes, but it depends on the corporate law of the jurisdiction and the company’s governing documents. Premium on common stock is contributed capital, not retained earnings, so it is often subject to legal restrictions. Even when permitted, companies usually rely on earned surplus or retained earnings as the primary source for dividends.