Corporate Accounting and Auditing · Underwriting of Securities

Underwriting Commission Calculation and Journal Entries

Updated 10 October 2026

Underwriting commission is the fee a company pays underwriters for agreeing to take up any shares or debentures the public does not subscribe. Calculate it as the agreed rate × issue price × the gross number of securities underwritten, whether or not the public subscribes them. Then record the commission, allot shares to underwriters, and settle the net balance.

Understand Underwriting Commission and Accounting Entries

An underwriter promises to subscribe for the securities that the public does not take up. In return, the company pays a commission. The commission is the price of the safety net. It is paid even if the public subscribes the whole issue and the underwriter takes nothing.

The commission is worked out on the issue price of the securities underwritten, not on face value. If shares of ₹10 are issued at ₹12, the base is ₹12. Section 40(6) of the Companies Act, 2013 permits a company to pay commission only if three conditions are met: the articles authorise the payment, the commission is disclosed in the prospectus, and the rate does not exceed the prescribed limit. Rule 12 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 sets that limit at 5% of the issue price for shares and 2.5% of the issue price for debentures. These are maximum limits, not fixed rates. If a question gives a lower rate, use the lower rate. Check that any rate given in a problem is within these limits.

The commission is calculated on the gross number of securities underwritten by each underwriter. It does not depend on the unsubscribed number. This is the point most students miss.

The accounting runs in three steps. First, the company records the commission it owes. Second, it allots shares to the underwriters for the shortfall they must take up. Third, the two amounts are set off. The underwriter pays the company the value of shares taken less the commission earned. If the commission is larger, the company pays the underwriter the difference.

The commission is a cost of raising capital. It may be charged to the Statement of Profit and Loss. Alternatively, Section 52(2)(d) of the Companies Act, 2013 permits securities premium to be used to write off the commission paid on an issue of shares or debentures. This is a permitted use, not a compulsory one, and the amount of premium utilised must be disclosed as required. Both treatments are acceptable, so follow the instruction given in the question.

Key rules to remember

Underwriting commission: Commission = Rate % × Issue price × Number of securities underwritten; Use issue price (face value + premium). Use gross underwriting, not the unsubscribed portion.
Maximum rate: Shares: up to 5% of issue price | Debentures: up to 2.5% of issue price; Maximum limits set by Rule 12 of the Companies (Prospectus and Allotment of Securities) Rules, 2014, under Section 40(6) of the Companies Act, 2013. Commission is allowed only if the articles authorise it, it is disclosed in the prospectus, and the rate is within the limit. The question may give a lower rate.
Shares taken up by an underwriter: Shares taken = Gross liability − Credit for applications received; Each underwriter first gets credit for the marked applications bearing their own stamp. Unmarked applications (and those not marked for anyone) are distributed among all underwriters in the ratio of their gross liability. If an underwriter's marked applications exceed their gross liability, that underwriter's liability is nil, and the excess is treated as unmarked and distributed among all underwriters, as per the question's method. Firm underwriting applications are treated as a separate item. They are credited to that underwriter first and are included in the credit given to that underwriter, as the question directs.
Net settlement with underwriter: Amount due from underwriter = Shares taken × Issue price − Commission; Positive: underwriter pays the company. Negative: company pays the underwriter.
Journal entries: 1) Underwriting Commission A/c Dr; To Underwriters A/c | 2) Underwriters A/c Dr; To Share Capital A/c; To Securities Premium A/c | 3) Bank A/c Dr; To Underwriters A/c (or Underwriters A/c Dr; To Bank A/c); Entry 2 uses the issue price, split into face value and premium.

How to solve Underwriting Commission and Accounting Entries questions

Use this order for any question on underwriting commission and entries. It also works when there are several underwriters.

1Note the issue price per share: face value plus premium. Note the commission rate and check it is within the legal limit.
2List each underwriter's gross underwriting (number of shares). Check that the total equals the issue or the portion underwritten.
3Calculate each underwriter's commission: rate × issue price × gross shares underwritten.
4Work out the shares each underwriter must take up after giving credit for applications received. First give each underwriter credit for the marked applications bearing their own stamp. Then distribute the unmarked applications in the ratio of gross liability. If any underwriter's marked applications exceed their gross liability, that underwriter's liability is nil and the excess is treated as unmarked and distributed among all underwriters, as per the question's method. Recompute. Follow any different method the question specifies.
5Calculate the value of shares taken: shares × issue price. Split it into share capital (face value) and securities premium.
6Find the net settlement for each underwriter: value of shares taken less commission. Decide who pays whom.
7Write the journal entries in order: commission due, shares allotted to underwriters, then bank settlement. Add a narration.
8Check that total value of shares allotted to underwriters less total commission equals the net bank movement.

Quickest way: Commission first, shares second, net third

When to use it: Use it in the objective section and in numerical questions where you need the figures fast and the entries are standard.

Write the issue price and rate. Compute commission as rate × issue price × gross shares for each underwriter.
Compute shares taken × issue price for each underwriter.
Subtract commission to get the net bank amount. Check that total shares value − total commission = net bank total.
Write the three journal entries using these totals. Split share capital and premium only in the shares-allotted entry.

Common mistakes in Underwriting Commission and Accounting Entries

Calculating commission on face value instead of issue price
Students are used to working with face value in share-capital entries.
Fix: Commission is always on issue price unless the question clearly says otherwise. Write the issue price at the top of your answer.
Calculating commission only on the shares the underwriter actually takes up
It feels logical to pay only for shares the underwriter bought.
Fix: Commission is payable on the gross shares underwritten, whether or not the public subscribes them.
Crediting the whole value of shares to Share Capital and ignoring the premium
The premium gets forgotten when the entry is written in a hurry.
Fix: Shares allotted to underwriters carry the full issue price. Credit face value to Share Capital and the balance to Securities Premium.
Passing a bank entry for the full value of shares taken without setting off commission
Students treat the underwriter as an ordinary applicant.
Fix: Record commission to the Underwriters A/c first. The bank entry is only for the net balance.
Using a commission rate above the maximum limit or mixing the share and debenture limits
The 5% and 2.5% limits are memorised loosely.
Fix: Remember the maximum is 5% for shares and 2.5% for debentures, both on issue price (Rule 12 of the Companies (Prospectus and Allotment of Securities) Rules, 2014). Commission is payable only if the articles authorise it and the prospectus discloses it. Use the rate given in the question, which will not exceed the limits.
Ignoring the treatment the question asks for when writing off the commission
Students assume one treatment is always right and forget the other is allowed.
Fix: Commission may be charged to the Statement of Profit and Loss, or written off against securities premium, which Section 52(2)(d) permits but does not require. The premium utilised must be disclosed as required. Both are acceptable, so read the question and follow its instruction.

Worked examples

Example 1

Alpha Ltd issued 1,00,000 equity shares of ₹10 each at a premium of ₹2 per share. The entire issue was underwritten by Mr. Rao at a commission of 4% on issue price. The public applied for 80,000 shares. Assume the full issue price is due on allotment. Pass the journal entries for commission, shares allotted to the underwriter and settlement.

Show the solution

Issue price = ₹10 + ₹2 = ₹12.
Commission = 4% × ₹12 × 1,00,000 = ₹48,000.
Shares taken by Mr. Rao = 1,00,000 − 80,000 = 20,000 shares.
Value of shares taken = 20,000 × ₹12 = ₹2,40,000. Share Capital = 20,000 × ₹10 = ₹2,00,000. Securities Premium = 20,000 × ₹2 = ₹40,000.
Net due from Mr. Rao = ₹2,40,000 − ₹48,000 = ₹1,92,000.
Entry 1: Underwriting Commission A/c Dr ₹48,000; To Mr. Rao (Underwriter) A/c ₹48,000.
Entry 2: Mr. Rao (Underwriter) A/c Dr ₹2,40,000; To Equity Share Capital A/c ₹2,00,000; To Securities Premium A/c ₹40,000.
Entry 3: Bank A/c Dr ₹1,92,000; To Mr. Rao (Underwriter) A/c ₹1,92,000.

Answer: Commission ₹48,000. Shares allotted to Mr. Rao: 20,000 shares for ₹2,40,000. He pays ₹1,92,000 in cash.

Example 2

Beta Ltd issued 60,000 equity shares of ₹10 each at ₹15 per share (premium ₹5). The issue was fully underwritten: X 40,000 shares and Y 20,000 shares. Commission is 5% of issue price. Applications were received for 48,000 shares, all unmarked. Unmarked applications are distributed in the ratio of gross liability. No applications were marked, so no underwriter has credit for marked applications, and no surplus arises. Show commission, shares taken up, net settlement and journal entries.

Show the solution

Issue price = ₹15. Unsubscribed shares = 60,000 − 48,000 = 12,000.
Marked applications are nil. The 48,000 unmarked applications are distributed in the ratio of gross liability, 40,000 : 20,000 = 2 : 1. X gets credit for 32,000 shares, Y for 16,000 shares. Neither credit exceeds the gross liability, so no surplus needs redistribution.
Shares taken: X = 40,000 − 32,000 = 8,000. Y = 20,000 − 16,000 = 4,000. Total 12,000.
Commission: X = 5% × ₹15 × 40,000 = ₹30,000. Y = 5% × ₹15 × 20,000 = ₹15,000. Total ₹45,000.
Value of shares taken: X = 8,000 × ₹15 = ₹1,20,000. Y = 4,000 × ₹15 = ₹60,000. Total ₹1,80,000.
Net due: X = ₹1,20,000 − ₹30,000 = ₹90,000. Y = ₹60,000 − ₹15,000 = ₹45,000. Total ₹1,35,000.
Entry 1: Underwriting Commission A/c Dr ₹45,000; To X ₹30,000; To Y ₹15,000.
Entry 2: X Dr ₹1,20,000; Y Dr ₹60,000; To Equity Share Capital A/c ₹1,20,000 (12,000 × ₹10); To Securities Premium A/c ₹60,000 (12,000 × ₹5).
Entry 3: Bank A/c Dr ₹1,35,000; To X ₹90,000; To Y ₹45,000.
Check: ₹1,80,000 − ₹45,000 = ₹1,35,000.

Answer: Total commission ₹45,000 (X ₹30,000, Y ₹15,000). X takes 8,000 shares and pays ₹90,000. Y takes 4,000 shares and pays ₹45,000.

Exam tips

In MCQs, check the base first. Most wrong options come from using face value instead of issue price.
Write the commission on gross underwriting as a separate line before anything else. Step marks are given for this working.
Show the three entries separately with narrations. Do not merge the commission and share-allotment entries.
Close with a check: shares value less commission equals bank receipt. It catches arithmetic slips quickly.
If the question asks for the Balance Sheet effect, show the treatment of the commission as stated. For example, if it is written off against securities premium under Section 52(2)(d), reduce the premium and show the amount utilised.

Practice questions from Underwriting of Securities

Underwriting Commission and Accounting Entries: frequently asked questions

On what amount is underwriting commission calculated?

It is calculated on the issue price of the shares underwritten, which is face value plus any premium. It applies to the gross number underwritten, not just the unsubscribed number. The rate is as agreed, within the legal limit.

What is the maximum underwriting commission a company can pay?

Section 40(6) of the Companies Act, 2013 permits commission only if the articles authorise it, it is disclosed in the prospectus, and the rate is within the prescribed limit. Rule 12 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 sets the maximum at 5% of the issue price for shares and 2.5% for debentures. Exam questions usually give a rate within these limits. Use the rate given.

Is commission payable if the public subscribes the full issue?

Yes. The underwriter has given a guarantee and the commission is the price for it. It is payable even if the underwriter takes up no shares.

How is underwriting commission treated in the company's books?

It is first debited to Underwriting Commission A/c and credited to the underwriter. It may then be charged to the Statement of Profit and Loss, or written off against securities premium, which Section 52(2)(d) of the Companies Act, 2013 permits. The premium utilised must be disclosed as required. Both treatments are acceptable, so follow the question's instruction.