## Bonus Shares on Equity Investment

### What Are Bonus Shares?

The company issues free shares to existing shareholders by capitalising reserves. The investor receives additional shares at zero cash cost.

### AS 13 Treatment

Cost of bonus shares = NIL (no cash outflow)
Record in Investment Account: increase the number of shares with ₹0 in the Amount column
The total cost of the holding remains unchanged, but is now spread over more shares → WAM per share decreases

### Journal Entry for Bonus Shares

```

Investment in Equity Shares A/c Dr (Shares column only — Amount: NIL)

To — (No credit entry needed; a narration entry suffices)

```

In practice, the ledger simply shows a new debit line:

> 01-Nov-X1: To Bonus Shares — 3,000 shares @ NIL = ₹0

### Revised WAM After Bonus

$$\text{New WAM} = \frac{\text{Original total cost}}{\text{Original shares + Bonus shares}}$$

### Ratio Calculation

Bonus ratio example — 1 share for every 5 held:

$$\text{Bonus shares} = \text{Total shares before bonus} \times \frac{1}{5}$$

Bonus shares are also included in WAM for all future disposals, including after partial sales.

### Key Reminder

Do not create a separate "Bonus Share Income" — there is no income at the time of issue. The economic benefit is reflected in the lower per-share WAM and the resulting higher profit when shares are eventually sold.

Worked example

### Example 1

Example — Bonus 1:5 Followed by Sale

Date	Transaction	Shares	Rate	Amount
01 Apr X1	Opening balance	10,000	₹11	₹1,10,000
01 May X1	Purchase	5,000	₹12	₹60,000
Before bonus		15,000		₹1,70,000
01 Nov X1	Bonus (1:5)	+3,000	NIL	₹0
After bonus		18,000		₹1,70,000

New WAM:

$$\frac{1{,}70{,}000}{18{,}000} = ₹9.44 \text{ per share}$$

Sale on 01 Feb X2 — 6,000 shares @ ₹14:

	Amount
Sale price (6,000 × ₹14)	₹84,000
Cost at WAM (6,000 × ₹9.44)	₹56,667
Profit	₹27,333

Compare with no-bonus scenario: profit was ₹16,000. Bonus does not create income now — it shifts profit recognition to the point of sale.

Closing balance: 12,000 shares × ₹9.44 = ₹1,13,333

Investment Ledger:

Particulars	Shares	Amount	Particulars	Shares	Amount
To Bal b/d	10,000	1,10,000	By Bank (Sale)	6,000	56,667
To Bank (Purchase)	5,000	60,000	By P&L (Profit)	—	27,333
To Bonus Shares	3,000	0	By Bal c/d	12,000	1,13,333
Total	18,000	1,70,000	Total	18,000	1,70,000

⚠️ Common exam mistakes

Putting an amount (other than zero) in the Amount column for bonus shares — bonus shares are free; their cost is nil.
Forgetting to include bonus shares in the denominator when recalculating WAM — results in an overstated per-share cost and understated profit on sale.
Treating bonus shares as dividend income — they are a capital adjustment, not income.
Not recording bonus shares in the ledger at all, then using the old share count for WAM — share count must always reflect the current holding.

Bare-Act text Para 17 (Bonus Shares) · AS 13 — Accounting for Investments · click to expand

Bonus shares received on an investment do not give rise to any income. An amount should not, therefore, be credited to income account but the cost of investment is to be spread over the increased number of shares, i.e., the cost per share is arrived at by dividing the cost of the original shares by the total number of shares (original plus bonus).

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AS 13 — Bonus Shares: Accounting Treatment and Impact on WAM

Worked example

⚠️ Common exam mistakes