Accounting for Stock Dividends and Stock Splits

Graziano Stefanelli
1 day ago
3 min read

Stock dividends and stock splits are two corporate actions that affect the number of shares outstanding and the presentation of equity, but they have different accounting and economic implications. Both actions are used by corporations to manage their capital structure, signal confidence in future growth, or improve stock liquidity.

Stock Dividends: Concept and Purpose

A stock dividend is a distribution of additional shares to existing shareholders in proportion to their holdings, rather than a payment of cash. Companies may issue stock dividends to conserve cash, reinvest profits, or reward shareholders when profits do not justify a cash payout. Stock dividends increase the total shares outstanding, but each shareholder’s proportional ownership remains unchanged.

Types of Stock Dividends

Stock dividends are generally categorized by size:

Small Stock Dividend: Usually less than 20–25% of outstanding shares.
Large Stock Dividend: More than 20–25% of outstanding shares.

The accounting treatment differs depending on the size.

Accounting for Small Stock Dividends

When a small stock dividend is declared, the company transfers the fair market value of the additional shares from retained earnings to common stock (par value) and additional paid-in capital (APIC).

Example:

A company with 1,000,000 shares outstanding declares a 10% stock dividend when the market price is $30, and the par value is $1 per share.

New shares issued: 1,000,000 × 10% = 100,000 shares
Fair value: 100,000 × $30 = $3,000,000

Journal Entry at Declaration and Issuance:

Dr. Retained Earnings ............................................. $3,000,000

Cr. Common Stock (100,000 × $1) .................. $100,000

Cr. APIC – Common Stock .............................. $2,900,000

Accounting for Large Stock Dividends

For large stock dividends, only the par value of the new shares is transferred from retained earnings to common stock.

Example:

If the same company declares a 30% stock dividend, issue price is ignored and only par value is used:

New shares issued: 1,000,000 × 30% = 300,000 shares
Par value: 300,000 × $1 = $300,000

Journal Entry:

Dr. Retained Earnings ............................................ $300,000

Cr. Common Stock ................................................. $300,000

Stock Splits: Concept and Purpose

A stock split increases the number of shares outstanding by splitting existing shares into a greater number of shares, reducing the par value per share proportionally. For example, a 2-for-1 split doubles the shares and halves the par value. Stock splits are often used to lower the trading price of shares, making them more accessible to a broader range of investors. Unlike stock dividends, stock splits do not affect retained earnings or total stockholders’ equity.

Accounting for Stock Splits

There is no journal entry for a standard stock split because the total par value remains unchanged, and only the number of shares and par value per share are adjusted in the records.

Example:

A company with 1,000,000 shares at $1 par value executes a 2-for-1 split.

Shares after split: 2,000,000
New par value: $0.50 per share

The balance sheet presentation of common stock is updated to reflect the new number of shares and new par value, but the aggregate value remains the same.

Stock Split vs. Stock Dividend: Key Differences

Effect on Ownership: Both actions do not change the percentage ownership of shareholders.
Effect on Equity Accounts: Stock dividends reduce retained earnings and increase common stock/APIC; stock splits do not affect any equity balances.
Disclosure: Both actions require note disclosure explaining the terms, reasons, and impact on shares outstanding.

Presentation and Disclosure

Companies must disclose stock dividends and stock splits in the notes to the financial statements, including details about the dates, ratios, amounts involved, and the effects on earnings per share and other per-share data. Retroactive adjustments to shares outstanding and EPS are required for all prior periods presented when a stock split or large stock dividend occurs.

Relevant Accounting Standards

US GAAP: ASC 505 – Equity
IFRS: IAS 33 – Earnings Per Share (for EPS adjustments)

Summary Table: Accounting for Stock Dividends and Splits

Action	Effect on Shares	Effect on Par Value	Effect on Retained Earnings	Journal Entry?
Small Stock Dividend	Increases	No change	Decreases	Yes (at market value)
Large Stock Dividend	Increases	No change	Decreases	Yes (at par value)
Stock Split	Increases	Decreases	No change	No

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