Which statement best distinguishes share capital and share premium?

Which statement best distinguishes share capital and share premium?

• A. Share capital represents the nominal value of issued shares; share premium is the amount received over nominal value; both form part of equity
• B. Share premium is a liability until profits are distributed
• C. Share capital is revenue; share premium is an expense
• D. Share premium is included within current assets

Answer: (A)

Share capital and share premium are two components of equity. Share capital represents the nominal value of shares that have been issued. The amount shareholders pay above that nominal value is recorded as share premium. Because both of these sit in the equity section, they are not liabilities and they are not revenues or expenses. That’s why the statement that correctly describes them—sharing the same status in equity while distinguishing nominal value from the extra amount paid—is the best choice. The other ideas conflict with how equity works: share premium isn’t a liability until profits are distributed, it isn’t revenue or an expense, and it isn’t a current asset.

Share capital and share premium are two components of equity. Share capital represents the nominal value of shares that have been issued. The amount shareholders pay above that nominal value is recorded as share premium. Because both of these sit in the equity section, they are not liabilities and they are not revenues or expenses. That’s why the statement that correctly describes them—sharing the same status in equity while distinguishing nominal value from the extra amount paid—is the best choice. The other ideas conflict with how equity works: share premium isn’t a liability until profits are distributed, it isn’t revenue or an expense, and it isn’t a current asset.