Financial Accounting · Capital structure and finance costs

Bonus Issues and Rights Issues: Differences and Accounting for ACCA FA

Updated 11 October 2026 · Fact-checked

A bonus issue gives existing shareholders free shares by converting reserves into share capital, so no cash comes in. A rights issue offers existing shareholders new shares for cash, usually below market price. To solve questions, work out the number of new shares, then post debit cash or reserves and credit share capital and share premium.

Understand Bonus Issues and Rights Issues

Companies change their share capital in different ways. Two common ways are bonus issues and rights issues. Both are offered to existing shareholders in proportion to their holdings, such as 1 new share for every 4 held. But they work very differently.

A bonus issue (also called a capitalisation or scrip issue) gives shares free. The company receives no cash. Instead it moves part of its reserves into share capital. Total equity does not change. Only the split inside equity changes. You can use reserves such as share premium, retained earnings or a revaluation surplus. In the exam, use the reserve the question tells you to use. If it lists a choice, share premium and other non-distributable reserves are often used first, as this keeps distributable profit intact.

A rights issue raises cash. Existing shareholders have the right to buy new shares, usually at a price below the current market price. The shares are issued at a price above or equal to nominal value. The nominal value goes to share capital. Any excess goes to share premium. Cash rises and equity rises by the same amount.

The key contrast is simple. Bonus issue: no cash, equity total unchanged, reserves fall. Rights issue: cash received, equity total rises, reserves (share premium) rise. Issue costs, if given, are normally deducted from share premium.

Key formulas to remember

Number of new shares: New shares = existing shares × (new shares ÷ shares held in the ratio); For a 1 for 4 issue, multiply existing shares by 1/4.
Bonus issue journal: Dr Share premium / Retained earnings / other reserve; Cr Share capital (new shares × nominal value); No cash entry. Total equity is unchanged.
Rights issue journal: Dr Cash (new shares × issue price); Cr Share capital (new shares × nominal value); Cr Share premium (new shares × (issue price − nominal value)); Equity and cash both rise by the cash received.
Issue costs: Dr Share premium; Cr Cash (costs of issuing shares); Costs of issuing equity are deducted from equity, not expensed in profit or loss.
Theoretical ex-rights price (TERP): TERP = total value of shares after the issue ÷ total number of shares after the issue; Value after = (old shares × market price) + cash raised. Used in calculations, but accounting entries use issue price.

How to solve Bonus Issues and Rights Issues questions

Use this method for any bonus or rights issue question. It keeps you from mixing up the two.

1Identify the type: free shares from reserves (bonus) or shares sold for cash (rights).
2Read the ratio and calculate the number of new shares from the existing number in issue.
3Find the nominal value of the new shares: new shares × nominal value.
4For a rights issue, find cash received: new shares × issue price. Share premium is cash minus nominal value.
5For a bonus issue, choose the reserve to use. Follow the question's instruction, otherwise use share premium first.
6Write the journal. Bonus: debit reserves, credit share capital. Rights: debit cash, credit share capital and share premium.
7Deduct any issue costs from share premium.
8Update the equity balances and check: bonus leaves total equity unchanged, rights raises it by net cash received.

Quickest way: The three-number shortcut

When to use it: Use it for multiple-choice and number-entry questions where you need a closing balance quickly.

Calculate new shares and write down three numbers: nominal value total, cash total, and the difference.
Bonus: nominal value total leaves reserves and enters share capital. Cash is zero.
Rights: nominal value total goes to share capital, difference goes to share premium, cash total is the debit.
Subtract issue costs from share premium only.
Add or subtract from the opening balances and quickly check that total equity moved as expected.

Common mistakes in Bonus Issues and Rights Issues

Recording cash received in a bonus issue.
Students assume every share issue brings in money.
Fix: Ask whether the shares are free. If so, there is no cash entry, only a transfer between equity accounts.
Crediting the whole rights issue proceeds to share capital.
Students forget that issue price may exceed nominal value.
Fix: Credit only nominal value to share capital. Credit the excess to share premium.
Using market price instead of issue price for the cash.
Questions give both prices and the market price looks important.
Fix: Cash received is always new shares × issue price. Market price is used only for TERP-type calculations.
Writing issue costs as an expense.
Costs feel like ordinary expenses.
Fix: Deduct share issue costs from share premium, as they are a cost of raising equity.
Applying the ratio to the wrong base, such as nominal value or reserves.
Rushing past the wording 1 for 4 held.
Fix: Apply the ratio to the number of shares in issue, then multiply by nominal value.
Thinking a bonus issue increases total equity.
Share capital goes up, so students assume equity rises.
Fix: Remember a reserve falls by the same amount. Total equity stays the same.

Worked examples

Example 1

A company has 400,000 ordinary shares of $1 each in issue. Share premium is $90,000 and retained earnings are $300,000. It makes a bonus issue of 1 share for every 4 held, using share premium first. What are the share capital and share premium balances after the issue?

Show the solution

New shares = 400,000 × 1/4 = 100,000.
Nominal value of new shares = 100,000 × $1 = $100,000.
Share premium is only $90,000, so use all of it: $90,000.
The remaining $10,000 comes from retained earnings.
Journal: Dr Share premium $90,000; Dr Retained earnings $10,000; Cr Share capital $100,000.
Share capital = $400,000 + $100,000 = $500,000.
Share premium = $90,000 − $90,000 = $0.

Answer: Share capital is $500,000 and share premium is $0. Retained earnings fall to $290,000. Total equity is unchanged.

Example 2

A company has 600,000 ordinary shares of $0.50 each. It makes a rights issue of 1 share for every 3 held at $1.20 per share. All rights are taken up. Issue costs of $4,000 are paid in cash. Calculate the share capital, share premium and net cash received.

Show the solution

New shares = 600,000 × 1/3 = 200,000.
Cash received = 200,000 × $1.20 = $240,000.
Share capital increase = 200,000 × $0.50 = $100,000.
Share premium = $240,000 − $100,000 = $140,000.
Deduct issue costs from share premium: $140,000 − $4,000 = $136,000.
Net cash = $240,000 − $4,000 = $236,000.
Check: equity rises by $100,000 + $136,000 = $236,000, equal to net cash.

Answer: Share capital rises by $100,000 and share premium by $136,000 (after costs). Net cash received is $236,000.

Exam tips

Read the first line carefully. The words free, capitalisation or scrip mean bonus issue. Cash, rights or offer to shareholders mean rights issue.
In multiple-choice questions, wrong options are often built from common slips such as crediting all proceeds to share capital or using market price. Work the numbers yourself first.
For number entry, show the final balance for the account asked, not the movement. Check whether the question wants the closing balance.
If the question lets you choose the reserve for a bonus issue, use share premium or other non-distributable reserves first, and state your choice if the format allows.
Always do the equity check at the end: bonus means total equity unchanged; rights means total equity up by net cash.

Practice questions from Capital structure and finance costs

Bonus Issues and Rights Issues in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Bonus Issues and Rights Issues: frequently asked questions

What is the main difference between a bonus issue and a rights issue?

A bonus issue gives free shares and transfers reserves into share capital, so no cash is received. A rights issue sells new shares to existing shareholders for cash. Total equity is unchanged by a bonus issue but rises with a rights issue.

Can share premium be used in a bonus issue?

Yes. Share premium can be used to pay up bonus shares. The journal debits share premium and credits share capital. Many exam questions ask you to use it first.

Does a bonus issue change the number of shares and the nominal value?

It increases the number of shares in issue and the total nominal value of share capital. The nominal value per share stays the same. Total equity does not change.

How are rights issue costs treated?

Costs of issuing shares are deducted from share premium. They are not charged to profit or loss. If there is not enough share premium, the question will usually say how to treat the balance.