Corporate Accounting and Financial Management · Related Aspects of Company Accounts

Accounting for Bonus Shares and Rights Issue

Updated 11 October 2026 · Fact-checked

A bonus issue capitalises reserves into fully paid shares for existing members; no cash comes in. A rights issue offers new shares to existing members, who pay for them. To solve questions, check Section 63 conditions, choose the permitted reserve, pass the entries, and compute the value of rights where asked.

Understand Accounting for Bonus Shares and Right Issue

A bonus issue converts part of your company's reserves into share capital. Members get extra fully paid shares and pay nothing. Total net worth does not change. Only the split between reserves and share capital changes.

Section 63 of the Companies Act, 2013 lets a company issue fully paid-up bonus shares out of three sources: free reserves, the securities premium account, or the capital redemption reserve account. Reserves created by revaluation of assets cannot be capitalised. Bonus shares cannot be issued in lieu of dividend.

The company must also meet conditions. It must be authorised by its articles. The general meeting must authorise it on the Board's recommendation. It must not have defaulted on interest or principal on fixed deposits or debt securities, or on statutory employee dues such as provident fund, gratuity and bonus. Any partly paid-up shares outstanding on the date of allotment must be made fully paid. It must also comply with prescribed conditions.

A rights issue is different. The company offers new shares to existing members, usually in proportion to their holding, and they pay the issue price. Cash comes in, so net worth rises. The entries follow the normal share issue entries: application, allotment, calls, with premium to securities premium account.

When a rights issue price is below market price, each right has a value. A member can sell the right or use it. The value of a right is the gain a member gets from buying at the lower price, and it is worked out using the theoretical ex-rights price.

Key rules to remember

Sources of bonus issue (Section 63): Free reserves, Securities premium account, Capital redemption reserve; Revaluation reserve cannot be capitalised. Bonus cannot be paid in lieu of dividend.
Bonus issue entry: Reserve A/c Dr. ; To Bonus to Shareholders A/c ; then Bonus to Shareholders A/c Dr. ; To Equity Share Capital A/c; Amount = number of bonus shares × face value. Shares are fully paid.
Number of bonus shares: Existing shares × bonus ratio; For 1:5 (one bonus for every five held), bonus shares = existing shares ÷ 5.
Theoretical ex-rights price: (Shares before × Cum-rights price + New shares × Issue price) ÷ (Shares before + New shares); Cum-rights price is the market price before the rights issue.
Value of a right: Cum-rights price − Ex-rights price; Also equals the value of the rights attached to the shares held.
Rights issue entry (cash received): Bank A/c Dr. ; To Equity Share Capital A/c ; To Securities Premium A/c; Premium, if any, goes to securities premium; this account is treated as paid-up capital for reduction rules.

How to solve Accounting for Bonus Shares and Right Issue questions

Use this order for any bonus or rights question.

1Read whether the question is bonus (no cash) or rights (cash received).
2For bonus, check Section 63 conditions: articles, general meeting authority, no defaults, partly paid shares made fully paid.
3Pick the permitted source. Exclude revaluation reserve. Use the order the question states, such as securities premium first.
4Compute the number of bonus shares from the ratio and the amount at face value.
5Pass entries: debit the reserve, credit share capital, through the Bonus to Shareholders account if asked.
6For partly paid shares, first make them fully paid by calling the unpaid amount, then issue the bonus.
7For rights, pass normal share issue entries and credit premium to securities premium.
8If value of rights is asked, compute the ex-rights price first, then the difference from the cum-rights price.

Quickest way: Three-line bonus check

When to use it: Use this when time is short and the question asks only for entries or the revised balance sheet extract.

Bonus amount = shares × ratio × face value.
Debit reserves in the stated order, credit equity share capital by the same amount.
Check that net worth is unchanged and total reserves fell by exactly the bonus amount.

Common mistakes in Accounting for Bonus Shares and Right Issue

Using revaluation reserve to fund a bonus issue.
It looks like any other reserve in the balance sheet.
Fix: Section 63 bars capitalising reserves created by revaluation of assets. Skip it and use other permitted sources.
Showing cash received for bonus shares.
Students mix bonus with rights issue.
Fix: Bonus is a transfer within equity. No bank entry is passed.
Forgetting to make partly paid shares fully paid before bonus.
The condition in Section 63(2)(e) is overlooked.
Fix: Make the call first, then issue bonus on the fully paid capital.
Applying bonus ratio to the wrong number of shares.
Students use the total capital in rupees instead of the share count.
Fix: Divide capital by face value first to get shares, then apply the ratio.
Crediting rights share premium to a general reserve.
Premium is treated as profit.
Fix: Premium received on issue of shares goes to securities premium account under Section 52.
Taking value of rights as cum-rights price minus issue price.
It seems the obvious gain.
Fix: Compute ex-rights price using the weighted formula, then subtract from the cum-rights price.

Worked examples

Example 1

The balance sheet of Kaveri Ltd shows 1,00,000 equity shares of ₹10 each fully paid, securities premium ₹3,00,000 and general reserve ₹4,00,000. The company issues bonus shares in the ratio 1:5, using securities premium first and then general reserve. Pass the entries. Assume all Section 63 conditions are met.

Show the solution

Bonus shares = 1,00,000 ÷ 5 = 20,000 shares.
Bonus amount = 20,000 × ₹10 = ₹2,00,000.
Securities premium available is ₹3,00,000, which covers the whole amount.
Entry 1: Securities Premium A/c Dr. ₹2,00,000 ; To Bonus to Shareholders A/c ₹2,00,000.
Entry 2: Bonus to Shareholders A/c Dr. ₹2,00,000 ; To Equity Share Capital A/c ₹2,00,000.
General reserve is not used.

Answer: Securities premium falls to ₹1,00,000, general reserve stays ₹4,00,000 and equity share capital rises to ₹12,00,000 (1,20,000 shares of ₹10).

Example 2

Equity shares of Narmada Ltd have a market price of ₹150 before a rights issue. The company offers 1 new share at ₹100 for every 4 held. Find the theoretical ex-rights price and the value of a right per share held.

Show the solution

Take 4 shares held and 1 new share.
Cum-rights value of 4 shares = 4 × ₹150 = ₹600.
Add the cash paid for the new share: ₹600 + ₹100 = ₹700.
Total shares after the issue = 5.
Ex-rights price = ₹700 ÷ 5 = ₹140.
Value of a right per share held = ₹150 − ₹140 = ₹10.

Answer: The theoretical ex-rights price is ₹140 and the value of a right is ₹10 per share held.

Exam tips

Write the Section 63 conditions briefly before the entries; ICSI answers reward the provision, then the working, then the conclusion.
Show the number of bonus shares and the amount as separate workings.
Follow the order of reserves given in the question. If none is given, state your assumption.
In rights problems, set out the ex-rights working in a neat line before the answer.
State that bonus shares cannot be issued in lieu of dividend if the question hints at it.

Practice questions from Related Aspects of Company Accounts

Accounting for Bonus Shares and Right Issue in other exams

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

Accounting for Bonus Shares and Right Issue: frequently asked questions

Which reserves can be used for bonus shares?

Under Section 63, you can use free reserves, the securities premium account or the capital redemption reserve account. Reserves created by revaluation of assets cannot be capitalised.

What is the difference between bonus shares and right shares?

Bonus shares are issued free out of reserves and bring no cash. Right shares are offered to existing members at a price, so the company receives cash. A bonus issue leaves net worth unchanged, while a rights issue increases it.

Can a company pay a bonus issue instead of dividend?

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

Where does the premium on a rights issue go?

It is transferred to the securities premium account, as required by Section 52. The account can later be used for purposes listed there, such as a bonus issue.