Issue of Bonus Shares: Conditions and Journal Entries

Understand Bonus Shares

Key rules to remember

Bonus shares to be issued

Number of bonus shares = Existing shares × Bonus ratio

For a 1:5 bonus (1 bonus for every 5 held), bonus shares = existing shares ÷ 5.

Amount capitalised

Amount to be capitalised = Number of bonus shares × Face value per share

This amount is debited to the reserves used. Bonus shares are fully paid, so the amount is the face value.

Entry on resolution

Reserve A/c Dr. (free reserves / securities premium / CRR) To Bonus to Shareholders A/c

Use this two-step form when the question shows a separate allotment step.

Entry on allotment

Bonus to Shareholders A/c Dr. To Equity Share Capital A/c

The share capital increases by the face value of the shares issued.

Partly paid shares

Calls in arrear / unpaid amount must be called up and received before bonus allotment

Section 63(2)(e) requires outstanding partly paid-up shares to be made fully paid on the date of allotment.

Order of use of reserves

Use the reserve the question names. If none is named, use free reserves first, then securities premium and CRR as needed.

Never use revaluation reserve. This ordering is the usual exam approach, not a rule in the Act.

How to solve Bonus Shares questions

1. 1Read the bonus ratio and the face value. Compute the number of bonus shares and the amount to be capitalised.
2. 2Check the source. Allowed: free reserves, securities premium, capital redemption reserve. Not allowed: revaluation reserve.
3. 3Check for partly paid shares. If any exist, first pass the entry for calls on them so they become fully paid.
4. 4Decide which reserves to use, in the order given in the question. Where the question gives no order, use free reserves such as general reserve and profit and loss balance, then securities premium and CRR.
5. 5Write the journal entries: Reserve A/c Dr. To Bonus to Shareholders A/c, then Bonus to Shareholders A/c Dr. To Equity Share Capital A/c. Add a narration.
6. 6Post the effect on the balance sheet. Equity share capital rises by the bonus amount. The reserves fall by the same amount. Total equity stays unchanged.
7. 7Run a quick check: increase in share capital must equal decrease in reserves.

Quickest way: Check source, compute amount, write two entries

Common mistakes in Bonus Shares

• Using revaluation reserve to fund the bonus issue

  It appears in the reserves list and looks like any other reserve.

  Fix: Remember the proviso to Section 63(1): reserves created by revaluation of assets cannot be capitalised. Skip it.

• Debiting Bank or crediting Bank in a bonus issue

  Students treat the issue like an ordinary share issue.

  Fix: No cash is received. Only reserves and share capital are affected.

• Ignoring partly paid shares

  Questions mention calls in arrear in a side note, and students miss it.

  Fix: Under Section 63(2)(e), partly paid shares must be made fully paid first. Pass the call entries and then the bonus entries.

• Capitalising more than the available reserves, or using securities premium before free reserves when the question gives an order

  Students skip the check against balances and the stated sequence.

  Fix: Compare the amount needed to each reserve balance. Follow the order given in the question.

• Treating a bonus as a dividend or crediting Profit and Loss

  Both give shareholders something extra, so they get confused.

  Fix: Section 63(3) says bonus shares cannot be issued in lieu of dividend. A bonus is a capitalisation of reserves, not an income distribution.

• Confusing bonus shares with a stock split

  Both raise the number of shares.

  Fix: In a bonus, reserves fall and capital rises. In a split, face value falls and capital and reserves stay the same.

Worked examples