Accounting of Bonus Share & Right Issue CA Foundation Accounts One Shot Revision | CA Rishabh Rohra

Introduction

This tutorial provides a comprehensive step-by-step guide on the accounting of bonus shares and right issues, specifically tailored for CA Foundation exams. It draws essential concepts and practical applications from a one-shot revision video by CA Rishabh Rohra. Understanding these topics is crucial for your upcoming exams and will enhance your accounting skills.

Step 1: Understanding Bonus Shares

Bonus shares are additional shares given to existing shareholders without any cost, based on the number of shares they already own.

Key Points

• Purpose: To reward shareholders and increase the liquidity of the shares.
• Accounting Treatment:
  • No cash outflow; the company capitalizes its reserves.
  • Journal entry:
    • Debit: Reserves and Surplus
    • Credit: Share Capital

Practical Advice

• Familiarize yourself with the concept of reserves and how they are used to issue bonus shares.

Step 2: Understanding Right Issues

A right issue is an offering of additional shares to existing shareholders, allowing them to purchase shares at a discounted price.

Key Points

• Purpose: To raise additional capital while giving existing shareholders a chance to maintain their ownership percentage.
• Accounting Treatment:
  • Cash inflow from shareholders purchasing additional shares.
  • Journal entry when shares are issued:
    • Debit: Bank Account
    • Credit: Share Capital

Practical Advice

• Understand the pricing mechanism and how it affects existing shareholders.

Step 3: Differences Between Bonus Shares and Right Issues

Recognizing the differences is vital for correct accounting treatment.

Comparison

• Bonus Shares:

  • No additional cash inflow.
  • Increases the number of shares without changing the overall equity.

• Right Issues:

  • Generates cash inflow.
  • Increases shareholder equity at a discounted price.

Common Pitfalls

• Confusing the accounting treatment for bonus shares and rights issues can lead to errors in financial statements.

Step 4: Practical Applications and Examples

Apply your understanding of bonus shares and rights issues through practical exercises.

Example Scenarios

1. Bonus Share Scenario:

   • Company A decides to issue 1 bonus share for every 5 shares held.
   • If a shareholder owns 100 shares, they will receive 20 bonus shares.

2. Right Issue Scenario:

   • Company B offers 1 share at ₹50 for every 4 shares held, with a market price of ₹70.
   • The shareholder evaluates whether to take up the right based on the discount offered.

Conclusion

This tutorial has outlined the essential concepts and accounting treatments for bonus shares and right issues. Understanding these topics is crucial for your CA Foundation exams and future accounting practices. As you prepare, consider practicing with real-world examples and exercises to solidify your knowledge. For further study, consider downloading the lecture notes from the provided links and engaging with additional resources.