Bonus Shares
A Mechanism Of Adding Profits To It's Share Capital

Bonus Shares or Capitalization of Profits or Ploughing Back of Profits is a mechanism by which profits of the company are added to it's share capital.

The greatest advantage of issuing bonus share is that profits can be distributed without disturbing the liquid capital of the company. And that the disparity between the effective capital and actual capital employed gets eliminated. Thus the Balance Sheet of the company reflects the true financial position of the company.

Sources of Bonus Shares:

The undistributed part of accumulated profit of the company over a period of time, which is part of the reserve account, is used to as equity capital to issue the bonus shares. The shareholders need not pay anything extra to get the bonus shares.

Accounting Entries For Issue Of Bonus Shares: On Declaration of Bonus:

Capital Redemption Reserve A/c------------Dr.

Securities Premium A/c------------Dr.

Capital Reserve A/c ------------Dr.

Investment Allowance Reserve A/c------------Dr.

Development Rebate Reserve A/c------------Dr.

General Reserve A/c------------Dr.

Profit & Loss Appropriation A/c------------Dr.

          To Bonus Dividend A/c

(Being bonus shares declared as per shareholders' Resolution No. --- Dated --- )

Note:

          Reserve created earlier was treated as liability and was normally credited. Now on utilization of the same reserve for declaration of bonus shares, it is debited for transferring of the reserve money to Bonus Dividend

On Issue of Shares At Par:

Bonus Dividend A/c------------Dr.

          To Share Capital A/c

(Being the bonus dividend amount utilized towards issue of XX No. of fully paid shares of Rs. X each to be distributed in the ratio of ---)

On Issue of Shares At Premium:

Bonus Dividend A/c------------Dr.

          To Share Capital A/c

          To Share Premium A/c

(Being the bonus dividend amount utilized towards issue of XX No. of fully paid shares of Rs. X each at a premium of Rs. X each to be distributed in the ratio of ---)

(Being shares originally issued at discount now forfeited.)