Introduction
Bonus shares, are additional shares given to existing shareholders without any additional cost. These shares are issued out of the company’s reserves or profits. While the issuance of bonus shares does not impact a company’s cash position, it involves a series of accounting entries that adjust the equity section of the balance sheet. This article will delve into the accounting procedures for issuing bonus shares, the necessary accounting entries, and their impact on financial statements.
Accounting Entries for Issuing Bonus Shares
The accounting treatment of bonus shares involves the transfer of amounts from reserves to the share capital account. Here are the detailed steps and the respective journal entries:
When Declaration of Bonus Shares are made :
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| yyyy-mm-dd | Reserves/Securities Premium A/c | XXXXX | |
|
To Bonus to Shareholders A/c |
XXXXX | ||
| (Being reserves or securities premium utilized for the issuance of bonus shares) | |||
| yyyy-mm-dd | Bonus to Shareholders A/c | XXXXX | |
|
To Share Capital A/c |
XXXXX | ||
| (Being the issuance of bonus shares to the shareholders) |
These entries effectively convert the reserves or the securities premium into paid-up share capital.
Heads of Accounting Ledgers
1. Reserve/Security Premium A/c – Reserve & Surplus under Capital Account
2. Bonus to Shareholders A/c – It is a temporary account used only to facilitate the accounting entries for issuing bonus shares. The entries are completed, and the balance in this account is transferred to the “Share Capital” account. So as per my Point of View it can be headed under Share Capital A/c .
Impact on Financial Statements
Issuing bonus shares does not change the total equity of the company; it merely reallocates the amounts within the equity section. Here’s a summary of the impact:
1. Balance Sheet: Increase in share capital and a corresponding decrease in reserves or securities premium.
2. Income Statement: No impact, as bonus shares are issued out of existing reserves.
3. Earnings Per Share (EPS): EPS may decrease as the number of shares outstanding increases, diluting the earnings per share.
Conclusion
The issuance of bonus shares is a strategic financial decision that affects the composition of a company’s equity but not its overall value. Proper accounting treatment ensures that the financial statements accurately reflect these changes, maintaining transparency and compliance with accounting standards. By understanding the rationale and accounting for bonus shares, stakeholders can better appreciate the company’s financial maneuvers and their implications.
