Share premium: do not book the full investor bank receipt as ordinary share capital

When a company issues shares for more than their nominal value, only the nominal amount goes to share capital. The excess is share premium and must be transferred to the share premium account under Companies Act rules. The bank receives one cash amount, but the equity accounting can split it into several components.

One bank receipt can create both share capital and share premium

Suppose an investor pays £500,000 for 100,000 shares with a nominal value of £0.01 each. Nominal share capital increases by £1,000 while £499,000 is share premium, subject to the actual legal terms.

The bank statement simply shows £500,000 received. The finance journal needs the share-allotment documents to split that cash correctly.

Companies Act section 610 creates the share premium account

Section 610 says that where a company issues shares at a premium, a sum equal to the aggregate premium must be transferred to an account called the share premium account.

This is not sales income and should not be posted to turnover. It forms part of the company's equity structure.

Nominal value is not the fundraising valuation

A startup can have shares with a nominal value of one penny while investors pay several pounds per share. The nominal value is a legal capital amount, not the economic value of the company.

Do not interpret a small share-capital figure at Companies House as evidence that the business raised only that amount. Most cash in a growth round can sit in share premium.

SH01 statement of capital needs the post-allotment share structure

The Companies Act requires the return of allotment and statement of capital after new shares are issued. The filing records share counts, classes and nominal capital, while accounting records capture the premium.

Reconcile the legal share count to the investment schedule before filing. A mistaken share quantity can affect ownership percentages even if the total bank cash is correct.

Share premium has restricted statutory uses

Section 610 sets specific permitted applications of the share premium account. It is not a distributable profit reserve that directors can treat like retained earnings.

Take accounting or legal advice before using or restructuring the account. A large share premium balance improves cash only because the company received capital; it does not automatically create dividend capacity.

Keep the full round reconciliation permanently

Store subscription documents, board minutes, SH01, cap table, bank receipts and equity journals together. Later investors and auditors often trace historic rounds to validate ownership and capital.

If several tranches closed at different prices, reconcile each separately. The same share class can create different premiums across funding dates.

Worked example: 250,000 shares with a nominal value of £0.01 are issued at £4 each. The company receives £1 million in cash. Nominal share capital increases by £2,500 and the remaining £997,500 is premium before considering transaction-specific accounting. Booking the whole £1 million to ordinary share capital would make the ledger disagree with the legal capital structure.

Do not confuse share premium with a bank reserve. The cash itself can be spent for legitimate company purposes once the financing is complete, subject to the company's obligations. The statutory restriction relates to how the equity reserve is treated, not to a requirement that the cash sit untouched in a separate bank account.

Fundraising fees can create another accounting question. Legal, advisory and platform costs can have different treatment depending on the transaction and accounting standards. Keep them separately identifiable rather than netting every fee directly against the investor bank receipt without advice.

Reconcile share premium by share class as well as by round where the company has several classes. Preference shares, ordinary shares and growth shares can have different nominal values and issue prices. One combined bank receipt can still create several legal capital entries.

When a historic fundraising record is corrected, update the accounting and company-secretarial evidence together. A replacement SH01 without a matching ledger review can leave public records and the financial statements showing different capital histories.

At year end, reconcile the share premium ledger to every allotment during the period. If the bank shows £3 million of investor receipts but the equity journals explain only £2.8 million, investigate before accounts are signed. The difference may be fees, a shareholder loan or a misposted subscription rather than genuine share premium.

Where the company later undertakes a capital reduction, bonus issue or other restructuring, the historic share-premium records become legally important. Keep the original calculation by allotment rather than relying only on the latest balance-sheet total. Corporate actions years later can require advisers to trace how the reserve arose and whether the proposed use is permitted.