Bonus Share Definition and Effect in Balance Sheet
Bonus Share Definition – “Bonus shares refers to the issuing of additional shares to the existing shareholder based upon the number of shares they own”. There is no payment charge for these additional shares.
There are occasions when company has earn profit but is unable to pay the dividend. This is because company do not have sufficient liquid funds to distribute. So, they convert their accumulated earnings into shares that are issued for free to the shareholders. And such shares are known as ‘Bonus Shares’.
Company distribute the bonus shares to their existing shareholders on the basis of their proportion of the shares they own. Most of the time companies use bonus share out of profits or the reserves. Since company do not receive any amount in return, a sum equal to the bonus issue is adjusted against the profit and transfer to the Equity share capital account.
The following reserves are used to issue Bonus shares –
- Profit and Loss Account
- General Reserve
- Free Reserve
- Revenue Reserves
- Sinking Fund
- Capital Reserve
- Share Premium or Securities Premium
- Capital Redemption Reserve
Bonus Share Example
In order to understand the bonus share definition clearly, let’s look at an example –
ABC Ltd capital structure is given below –
1,00,000 equity shares of Rs. 10 each …………………………………………………………………………………………10,00,000
Securities Premium ………………………………………………………………. ………………………………………………….80,000
General Reserve ………………………………………………………………………………………………………………………..3,00,000
Profit and Loss A/c…………………………………………………………………………………………………………………….2,00,000
Now company declares bonus of 1 share for every 10 shares. This means that for every 10 shares that a shareholder owns will receive 1 share of Rs. 10 each.
The total number of bonus share = (1 × 1,00,000) / 10
= 10,000 × 10
= Rs. 1,00,000
Sources of funds to issue bonus shares
Securities Premium ……………………………………………………………………80,0000
Add: Profit and Loss Account ………………………………………………………20,0000
Total …………………………………………………………………………………………… 1,00,000
Effect in Balance Sheet of Bonus Issue
| Liabilities | Amount |
| Authorized Capital | – |
| Issued and Paid up Capital | |
| 1,10,000 equity shares of Rs. 10 each, fully paid | 11,00,000 |
| Reserve and Surplus | |
| Securities Premium | – |
| P/L A/c (2,00,000-20,000) | 1,80,000 |
| General Reserve | 3,00,000 |
From above example, it is very clear that bonus issue does not have any effect on the balance of company’s Balance Sheet.
Advantages of Bonus Share Issue
- Bonus Issue is a psychological satisfaction for the shareholders that instead of not getting anything, they have got something.
- Shareholders are not required to pay off tax on bonus share issue.
- These bonus share can be traded in the market just like other shares and shareholders can earn profit
