Bonus Shares Journal Entry
Bonus shares are the additional share that the company issues to the existing shareholder as a bonus. It does not require the shareholders to make any payment.
Bonus share is the distribution of company retained earnings to the existing shareholders. The company uses it to give benefits to shareholders without cash paid.
A company share is a unit of ownership in a business organization. Most businesses are structured as corporations, and each share represents a small portion of the total value of the corporation. When you purchase shares in a company, you become a shareholder. As a shareholder, you have certain rights and privileges, including the right to vote on corporate matters and to receive dividend payments if the company is profitable.
Shares can be bought and sold on stock exchanges, and their price is determined by supply and demand. If more investors are interested in buying shares than selling them, the price will go up. Conversely, if more investors are selling shares than buying them, the price will go down. Company share prices can also be affected by factors such as the overall performance of the economy and the health of the particular industry in which the company operates.
The shareholders expected to receive the dividend base on the amount of share invested. The dividend is the distribution of company profit to the shareholders. The dividend will require the cash balance to give dividends to the shareholders.
The company may generate enough profit from the previous years. However, the company does not have enough cash to pay shareholders. So they decide to issue additional shares to the shareholders.
Journal Entry for Bonus Share
The company may have accumulated the profit which records in the retained earnings account. But there is not enough cash for shareholders, so they decide to distribute the retained earnings as additional shares.
The journal entry for bonus shares is debiting retained earnings and credit common stock.
| Account | Debit | Credit |
|---|---|---|
| Retained Earnings | XXXX | |
| Common Stock | XXXX |
The retained earnings will reduce from the company’s balance sheet. It will increase the common stock account base on the total par value.
The transaction will increase the number of shares in the market. It will reduce the share price as the supply increase. It will allow the existing shareholders to sell the new share for cash if they need it.
Example
Company ABC has made a good profit for several years. However, the company does not have enough cash to pay dividends to the shareholders. The management wants to provide some benefits to the shareholders. They decide to issue the bonus share amount $ 20,000 which a par value of $ 1. Please prepare a journal entry for bonus share.
ABC issue bonus shares which allow the shareholders to obtain new shares for free.
The journal entry debited retained earnings $ 20,000 and credit common stock $ 20,000.
| Account | Debit | Credit |
|---|---|---|
| Retained Earnings | 20,000 | |
| Common Stock | 20,000 |