Bonus Issue – Illustration And Accounting Treatment ( Part 2 of 2)

In my first part of article, I have gone through the other details of bonus issue leaving only the illustration and the accounting treatment portion untouched.

So let’s look at the below simple illustration to demonstrate a pre and post bonus issue in a company’s balance sheet.

To reinforce the fact that my earlier article have mentioned that bonus issue is merely a juggling of bookkeeping entries and has NO impact to the shareholders fund in the balance sheet, let’s assume:-

The following scenario before any bonus issue:

Company has:

Ordinary share capital 10m no of shares $10 m

Capital Reserve $20 m

General Reserve $10 m

Total Shareholders Fund $ 40 m

If a company issue one to one bonus issue, the after bonus issue impact to the shareholders fund is as follows:

Ordinary share capital 20m no of shares $10m +$10m =$20m

Capital Reserve $20m – $10m =$10m

General Reserve ( assuming no change) $10m

Total Shareholders Fund $40m

The above illustration shows that there is no change in the balance sheet:

• The total number of share have increased in this case by another 10million
• Shareholders fund remains unchanged during the pre- and post bonus period.

And,

The accounting entry is:

Debit: Capital Reserve 10m

Credit: Share Capital 10m

Being capitalization of reserve to share capital account.