## Employee Stock Option Plan (ESOP)
### Concept
A company promises employees the right to buy shares at a below-market price (exercise price) after completing a vesting period. The difference between market price and exercise price is the employee compensation expense recognised over the vesting period.
### Key Terms
| Term | Meaning |
|---|---|
| Grant Date | Date options are promised |
| Vesting Period | Period employee must serve to earn options |
| Exercise Price | Price employee pays per share on exercise |
| Market/Fair Value | Price of share at grant date |
| ESOP Outstanding A/c | Liability / equity reserve built up during vesting |
| ESOP Expense | Market price – Exercise price (per share) |
### Journal Entry on Exercise of Options
When employees exercise options and pay the exercise price:
```
Bank A/c Dr [Exercise Price × Shares exercised]
ESOP Outstanding A/c Dr [ESOP Expense × Shares exercised]
To Equity Share Capital A/c [Face Value × Shares exercised]
To Securities Premium A/c [(Market Price – Face Value) × Shares exercised]
```
Logic of credits:
- Share Capital gets face value per share
- Securities Premium gets (Market price – Face value) per share
- Total credit = Market price × shares
- Total debit = Exercise price × shares + ESOP Outstanding expense × shares = Market price × shares ✓
### Verification
```
Total Debit = Exercise Price × n + (Mkt – Exercise) × n = Mkt × n
Total Credit = Face × n + (Mkt – Face) × n = Mkt × n ✓
```