The term “shares” may sound quite familiar to most people, but what exactly shares are? Generally, shares refer to the units of ownership interests that one has in a company or the financial assets that can provide one with the equal distribution that the company has declared in the form of a dividend. For some investors, the dividends from the companies they have invested are one of the sources of their regular income.
However, there are some occasions where a company does not have enough cash with it, yet its shareholders want regular income. This is when the company may issue bonus shares to them. These are the shares which the company issues to its existing shareholders according to the proportion of shares they have in hand at no cost. In this case, the exchange of funds between the company and its shareholders does not take place. The issuance of bonus shares only involves the transfer of the company’s profits, where the company will transfer those profits from its retained earnings to its equity share capital. Then, it will transfer the allotted shares to the shareholder’s dematerialized account.
As an instance, XYZ Corporation announced that it would issue bonus shares to its shareholders in the ratio of 1:3. This indicates that it will issue one more share for every three shares the shareholders have. Thus, if a shareholder holds 300,000 shares, the bonus shares that he will receive will be 100,000, making the total number of shares he holds to reach 400,000 (300,000 + 100,000). He does not need to pay for the extra 100,000 shares that XYZ Corporation has issued to him.
When a company decides to issue bonus shares to its shareholders, the accountants need to pass the corresponding journal entries in the company’s books of accounts too. If the company issues bonus shares out of its retained earnings, the accountants need to record such a transaction by debiting the retained earnings account and crediting the equity share capital account.
Some may feel confused between the issuance of bonus shares and the rights issue. However, both of them have significant dissimilarities. The company issues bonus shares to the shareholders at no cost, and it will issue the shares at a specific proportion of the shares that it has issued originally. In contrast, the rights issue is the rights that the company offers to its existing shareholders to buy extra new shares that it has issued. Typically, the rate the company issues rights issues will be lower when compared to the market rate.
The issuance of bonus shares can bring some advantages to both the company and its shareholders. Bonus shares allow the companies that do not have enough cash on hand to issue them, rather than distributing dividends in the form of cash, thus maintaining the confidence of shareholders towards the company. Besides, the issuance of bonus shares increases the company’s liquidity, and this may result in an increase in share prices. This will increase the size of the share capital of the company too.
If you find the concepts above hard to understand, you don’t have to worry too much as this mostly applies to large corporations. The accounting treatments for the equity of small companies are easier, and they do not involve complicated facts as such. Although the accounting tasks for small companies are relatively easier when compared to the large business empires, it does not mean that you can neglect the importance of maintaining proper accounting records in your books. If you need assistance in your company’s accounting-related tasks, feel free to contact an accounting firm in Johor Bahru, and the professionals are always ready to help.