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Corporate Accounting and Financial Management · Accounting for Share Capital

Accounting for Bonus Shares, Right Shares and Sweat Equity

Updated 11 October 2026 · Fact-checked

A bonus issue capitalises reserves into fully paid shares for existing members, with no cash received. A rights issue offers new shares to existing equity holders in proportion to their holding, for cash. Sweat equity is issued to directors or employees for know-how or value addition. Solve by checking the legal conditions, then passing the entries.

Understand Issue of Bonus Shares and Right Shares

Companies raise or restructure capital in three related ways in this topic. Each has its own legal conditions and its own accounting.

A bonus issue converts reserves into share capital. The company receives no cash. Members get extra fully paid shares, and the total of equity does not change. Only the split between reserves and share capital changes. Section 63 lets a company issue fully paid-up bonus shares out of free reserves, the securities premium account or the capital redemption reserve account. It cannot capitalise reserves created by revaluation of assets. Bonus shares cannot be issued in lieu of dividend.

A rights issue is a further issue of shares under section 62(1)(a). The shares are offered first to existing equity holders in proportion to their paid-up capital, by a letter of offer. The offer must stay open for at least fifteen days (or such lesser number of days as may be prescribed) and not more than thirty days. Unless the articles say otherwise, the offer includes a right to renounce the shares in favour of another person. If the offer is not accepted or is declined, the Board may dispose of the shares in a manner not disadvantageous to the shareholders and the company. Cash is received, so the accounting follows the normal share issue entries, with premium going to securities premium.

Sweat equity shares under section 54 are issued from a class of shares already issued. The issue needs a special resolution. The resolution must state the number of shares, the current market price, the consideration, if any, and the class of directors or employees. For listed companies, SEBI regulations apply. For unlisted companies, the prescribed rules apply. Sweat equity shares rank pari passu with other equity shares.

The sources matter in exams. Securities premium can be used for bonus shares under section 52(2)(a). Remember that section 52 also lists other uses, such as writing off preliminary expenses and share issue expenses, and buy-back under section 68.

Key rules to remember

Sources of bonus issue (s.63(1))
Free reserves | Securities premium account | Capital redemption reserve
Reserves created by revaluation of assets cannot be capitalised.
Bonus issue entry
Reserve A/c Dr. (to the extent used) To Bonus to Shareholders A/c; then Bonus to Shareholders A/c Dr. To Equity Share Capital A/c
No cash moves. Total equity is unchanged. If partly paid shares exist, first make them fully paid (s.63(2)(e)).
Conditions for capitalisation (s.63(2))
Authorised by articles + Board recommendation and general meeting authorisation + no default on deposits, debt securities or employee statutory dues + partly paid shares made fully paid + prescribed conditions
All must be satisfied. Bonus cannot be issued in lieu of dividend (s.63(3)).
Rights offer period (s.62(1)(a)(i))
Not less than 15 days (or lesser prescribed number) and not more than 30 days
Offer not accepted in this time is deemed declined.
Rights entitlement
Rights shares offered = existing shares held × rights ratio
Ratio is applied to equity shares in proportion to paid-up capital, as nearly as circumstances admit.
Sweat equity conditions (s.54(1))
Special resolution + number, current market price, consideration and class of recipients stated + SEBI regulations (listed) or prescribed rules (unlisted)
Issued from a class already issued. Ranks pari passu with other equity shares (s.54(2)).
Securities premium uses (s.52(2))
Bonus shares | Preliminary expenses | Share or debenture issue expenses, commission, discount | Premium on redemption of preference shares or debentures | Buy-back under s.68
Do not use it for general dividends or other purposes.

How to solve Issue of Bonus Shares and Right Shares questions

Use the same sequence for any question on bonus, rights or sweat equity. It keeps both the law and the entries right.

  1. 1Identify the type of issue: bonus, rights or sweat equity. Bonus brings no cash. Rights bring cash. Sweat equity is for non-cash value from directors or employees.
  2. 2Check legal conditions given in the facts: articles, Board and general meeting approval, defaults, partly paid shares, special resolution.
  3. 3For bonus, decide the number of new shares from the ratio and the existing shares. Compute the amount as number × face value.
  4. 4Choose the source of funds. Check no revaluation reserve is used. Apply the order the question gives, or use capital reserves and premium as directed.
  5. 5Pass the journal entries. For bonus, debit reserves and credit share capital. For rights, debit bank and credit share capital and securities premium.
  6. 6Update the balance sheet extract: show the new share capital and reduced reserves, and confirm total equity.
  7. 7End with a one-line conclusion citing the section.

Quickest way: Three-line bonus check

When to use it: Use this when a question gives a bonus ratio and a list of reserves and asks for entries or a revised balance sheet.

  1. Bonus amount = existing paid-up shares ÷ ratio base × bonus shares × face value.
  2. Pick sources in the order stated. If revaluation reserve is listed, skip it.
  3. Write one compound entry: Reserves Dr. To Equity Share Capital. Then confirm total equity before and after is equal.

Common mistakes in Issue of Bonus Shares and Right Shares

  • Using revaluation reserve to fund bonus shares

    It appears in the reserves list, so students treat it like any other reserve.

    Fix: Section 63(1) proviso bars capitalising reserves created by revaluation of assets. Skip it.

  • Showing cash received on a bonus issue

    Students confuse bonus with a rights issue.

    Fix: Bonus is a transfer within equity. No bank entry. Total equity stays the same.

  • Ignoring outstanding partly paid shares

    Students focus only on the ratio and sources.

    Fix: Under s.63(2)(e), partly paid shares on the date of allotment must be made fully paid first. Check the facts.

  • Treating a rights issue as open to anyone

    Mixing rights issue with a preferential issue.

    Fix: Rights shares are offered first to existing equity holders in proportion to paid-up capital. Offers to other persons need a special resolution under s.62(1)(c).

  • Stating the wrong offer period for rights

    Memorising one number only.

    Fix: Say not less than fifteen days (or lesser days as prescribed) and not more than thirty days.

  • Writing sweat equity needs only a Board resolution

    Students recall only the approval of the Board for general issues.

    Fix: Section 54(1)(a) requires a special resolution, with the details in s.54(1)(b).

Worked examples

Example 1

The balance sheet of Kaveri Ltd shows: Equity share capital 50,000 shares of ₹10 each fully paid ₹5,00,000; Securities premium ₹1,00,000; General reserve ₹2,00,000; Revaluation reserve ₹80,000. The company, which is authorised by its articles and general meeting and has no defaults, issues bonus shares in the ratio 1:2 using the securities premium first and then the general reserve. Pass the entries and give the revised equity figures.

Show the solution
  1. Bonus shares = 50,000 × 1/2 = 25,000 shares.
  2. Bonus amount = 25,000 × ₹10 = ₹2,50,000.
  3. Source 1: securities premium ₹1,00,000 (allowed under s.63(1)(ii)).
  4. Source 2: general reserve ₹1,50,000 (the balance needed). Revaluation reserve is not used.
  5. Entry 1: Securities Premium A/c Dr. ₹1,00,000; General Reserve A/c Dr. ₹1,50,000; To Bonus to Shareholders A/c ₹2,50,000.
  6. Entry 2: Bonus to Shareholders A/c Dr. ₹2,50,000; To Equity Share Capital A/c ₹2,50,000.
  7. Revised: Equity share capital ₹7,50,000; Securities premium nil; General reserve ₹50,000; Revaluation reserve ₹80,000.
  8. Check total equity: before ₹5,00,000 + ₹1,00,000 + ₹2,00,000 + ₹80,000 = ₹8,80,000. After ₹7,50,000 + ₹50,000 + ₹80,000 = ₹8,80,000.

Answer: 25,000 bonus shares of ₹10 are issued, capitalising ₹2,50,000 (₹1,00,000 from securities premium and ₹1,50,000 from general reserve). Equity share capital becomes ₹7,50,000 and total equity stays ₹8,80,000.

Example 2

Meera Ltd has 1,00,000 equity shares of ₹10 each fully paid. It makes a rights issue of 1 share for every 4 held at ₹15 per share (₹10 face value, ₹5 premium), payable in full on acceptance. All shareholders accept. Pass the entries.

Show the solution
  1. Rights shares = 1,00,000 ÷ 4 = 25,000 shares.
  2. Cash received = 25,000 × ₹15 = ₹3,75,000.
  3. Share capital = 25,000 × ₹10 = ₹2,50,000.
  4. Securities premium = 25,000 × ₹5 = ₹1,25,000, transferred to the securities premium account under s.52(1).
  5. Entry on receipt: Bank A/c Dr. ₹3,75,000; To Equity Share Application and Allotment A/c ₹3,75,000.
  6. Entry on allotment: Equity Share Application and Allotment A/c Dr. ₹3,75,000; To Equity Share Capital A/c ₹2,50,000; To Securities Premium A/c ₹1,25,000.
  7. Check: ₹2,50,000 + ₹1,25,000 = ₹3,75,000.

Answer: 25,000 rights shares are allotted. Bank ₹3,75,000 is received. Equity share capital increases by ₹2,50,000 and securities premium by ₹1,25,000.

Exam tips

  • Write the section number with each condition: s.63 for bonus, s.62 for rights, s.54 for sweat equity, s.52 for securities premium.
  • In bonus problems, always say that revaluation reserve cannot be capitalised, even if the question does not ask.
  • Show the check that total equity is unchanged after a bonus issue. It earns marks and catches errors.
  • For differences between bonus and rights, give points on cash, source, purpose, offer to whom and effect on equity.
  • End each theory answer with a clear conclusion on whether the issue is valid.

Practice questions from Accounting for Share Capital

Issue of Bonus Shares and Right Shares in other exams

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

Issue of Bonus Shares and Right Shares: frequently asked questions

What is the difference between bonus shares and right shares?

Bonus shares are issued free to existing members out of reserves, so no cash comes in. Right shares are offered to existing equity holders in proportion to their holding, and they pay for them. Bonus does not change total equity, while rights increase it.

Can securities premium be used to issue bonus shares?

Yes. Section 63(1) allows bonus shares out of free reserves, the securities premium account or the capital redemption reserve account. Section 52(2)(a) also permits securities premium to be used for fully paid bonus shares.

Can a company issue bonus shares in lieu of dividend?

No. Section 63(3) says bonus shares shall not be issued in lieu of dividend.

What approval is needed for sweat equity shares?

A special resolution under s.54(1)(a). It must state the number of shares, the current market price, the consideration, if any, and the class of directors or employees. Listed companies follow SEBI regulations and unlisted companies follow the prescribed rules.