Companies may change their capital structure without raising new external funds by:
This topic is usually theory + short journal entries. In exams, focus on:
You should be able to:
Bonus shares are additional shares issued free of cost to existing shareholders in a fixed ratio (e.g., 1:5), by capitalising reserves.
Important: Bonus issue increases share capital but does not bring fresh cash.
Bonus shares are issued by utilising eligible reserves, such as:
Access the complete note and unlock all topic-wise content
It's free and takes just 5 seconds
Download this note as PDF at no cost
If any AD appears on download click please wait for 30sec till it gets completed and then close it, you will be redirected to pdf/ppt notes page.
Companies may change their capital structure without raising new external funds by:
This topic is usually theory + short journal entries. In exams, focus on:
You should be able to:
Bonus shares are additional shares issued free of cost to existing shareholders in a fixed ratio (e.g., 1:5), by capitalising reserves.
Important: Bonus issue increases share capital but does not bring fresh cash.
Bonus shares are issued by utilising eligible reserves, such as:
Exam note: Mention “as per Companies Act/rules” for eligibility.
Common conditions (write any 4–6):
Accounting has two broad steps:
General Reserve / P&L / Securities Premium A/c Dr
To Bonus Issue A/c
Bonus Issue A/c Dr
To Share Capital A/c
That’s the standard exam-friendly entry set.
Buy-back means the company purchases its own shares from existing shareholders and cancels them, reducing share capital.
Write as “as per Companies Act/rules” and mention typical points:
Broadly:
Exact entries depend on the problem and source of buy-back.
CRR is created to maintain capital when the company buys back shares out of free reserves.
Simple logic: Buy-back reduces share capital → transfer equivalent amount from free reserves to CRR → protects creditors by maintaining “capital base”.
Get instant access to notes, practice questions, and more benefits with our mobile app.
From this topic
Bonus shares can be issued by capitalising eligible reserves such as (any three):
Thus, reserves are converted into share capital through bonus issue.
Conditions for bonus issue (any three):
Write “as per Companies Act/rules” in exams.
Buy-back is repurchase and cancellation of a company’s own shares. It reduces share capital.
When buy-back is made out of free reserves, creditors’ protection requires maintaining capital base. So an amount equal to the nominal value of shares bought back is transferred from free reserves to CRR.
Flow (write): Free reserves used → Share capital reduced → Transfer to CRR → Capital base maintained
CRR ensures the company does not reduce its capital base unfairly when buy-back is financed from free reserves.