Accountants generally record the transaction at the fair value of (1) the property or services received or (2) the stock issued, whichever is more clearly evident. Keep in mind your journal entry must always balance (total debits must equal total credits). Another reason, and arguably a more logical one, is to increase a stock’s liquidity.

• Notice that the market cap stays the same, doubling the number of shares outstanding to 20 million while simultaneously reducing the stock price by 50% to $20 for a capitalization of $400 million.
• A reverse/forward stock split consists of a reverse stock split followed by a forward stock split.
• If the event is a stock split, there is no change in either Retained Earnings or Common Stock, only a decrease in par value and an increase in the number of issued and outstanding shares.

The benefit to the shareholders comes about, in theory, because the split creates more attractive opportunities for other future investors to ultimately buy into the larger pool of lower priced shares. The 2-for-1 stock split will cause the quantity of shares outstanding to double and, in the process, cause the market price to drop from $80 to $40 our current tax v the flat tax v the fair tax per share. For example, if a corporation has 100,000 shares outstanding, a 2-for-1 stock split will result in 200,000 shares outstanding. Assume that a corporation’s common stock has risen to $150 per share and there are 100,000 shares issued and outstanding. The board of directors would like the shares of common stock to be trading near $50.

For example, a 1-for-2 stock split would be called a reverse stock split because it would reduce the number of outstanding shares to their half and increase the per share par value to double. Consequently, the ultimate par value amount to be reported in the balance sheet will remain unaffected, similar to the forward stock split, explained earlier in this article. Since a stock dividend distributable is not to be paid with assets, it is not a liability. Similar to distribution of a small dividend, the amounts within the accounts are shifted from the earned capital account (Retained Earnings) to the contributed capital account (Common Stock) though in different amounts.

The process of splitting the stock involves issuing additional shares to current shareholders in proportion to their current shareholding. If a balance sheet date intervenes between the declaration and distribution dates, the dividend can be recorded with an adjusting entry or simply disclosed supplementally. The process of a stock split is expensive, requires legal oversight, and must be performed in accordance with regulatory laws. The company wanting to split their stock must pay a great deal to have no movement in its over market capitalization value. On 31 January 2021, the board of directors proposed a 5-for-4 stock split which was duly approved and new shares were distributed among stockholders.

Stock Split

A stock dividend is a type of dividend distribution in which additional shares are distributed to shareholders, usually at no cost. A Stock Split is the division of outstanding shares into several new ones. These new shares are then traded on the same exchange at current market prices. The split increases the number of shares outstanding, but the company’s overall value does not change. Immediately following the split the share price will proportionately adjust downward to reflect the company’s market capitalization. If a company pays dividends, the dividend per share will be adjusted accordingly, keeping overall dividend payments the same.

• A split is usually authorized in order to alter the price of a company’s stock downward, so that it will be more accessible to retail investors.
• A stock split, though, does nothing to the company’s market capitalization.
• Since the same company is now represented by more shares, one would expect the market value per share to suffer a corresponding decline.
• Stock dividends do not affect the individual stockholder’s percentage of ownership in the corporation.
• Regardless of the type of dividend, the declaration always causes a decrease in the retained earnings account.
• A reverse stock split occurs when a company attempts to increase the market price per share by reducing the number of shares of stock.

Shares with a par value of  $5 have traded (sold) in the market for more than $600, and many  $100 par value preferred stocks have traded for considerably less than par. Par value is not even a reliable indicator of the price at which shares can be issued. New corporations can issue shares at prices well in excess of par value or for less than par value if state laws permit.

Journal Entries for a Reverse Stock Split

The 8 slices of a typical pizza represent the shares of stock and the $2 cost per share is the par value of the stock. When I double cut the pizza, this represents a 2-1 stock split with 16 shares of stock (or slices of pizza) for the new par value of $1 per share. The declaration to record the property dividend is a decrease (debit) to Retained Earnings for the value of the dividend and an increase (credit) to Property Dividends Payable for the $210,000. The total capitalization (value of the shares outstanding) is $200,000 (10,000 x $20). However, each share is now only worth half the market price it was before the split. For an individual shareholder, the total market value of their holding also remains the same.

The receipt of the additional shares will not result in taxable income under existing U.S. law. The tax basis of each share owned after the stock split will be half of what it was before the split. First, with 100,000 shares outstanding and a share price of $10, the market capitalization of ABC Company is $1,000,000. To effect the split, the stockholders approved an increase in the authorized common stock from 10,000,000 to 25,000,000 shares. All references to per-share data and stock option data have been adjusted to reflect this stock split.

Stockholders’ Equity Outline

The following is an example of a memorandum entry to record a stock split. A finance professor will likely tell you that splits are totally irrelevant—yet companies still do it. Splits are a good demonstration of how corporate actions and investor behavior do not always fall in line with financial theory. This very fact has opened up a wide and relatively new area of financial study called behavioral finance. However, if this event is a stock dividend, the stock’s par or stated value will not change, but Retained Earnings will decrease and Common Stock will increase. Because the price of the firm’s stock is likely to fall to $30, the total market value of each stockholder’s investment immediately after the split will be about the same as it was before the split.

What is the journal entry to record a stock split or reverse stock split?

PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years.

In addition, corporations use dividends as a marketing tool to remind investors that their stock is a profit generator. As there has been no change in the total par value, then no stock split journal entry needs to be made in the records of the business. A stock dividend is a distribution of shares of a company’s stock to its shareholders.

Example: Disclosure of Stock Split

Stock splits are events that increase the number of shares outstanding and reduce the par or stated value per share. For example, a 2-for-1 stock split would double the number of shares outstanding and halve the par value per share. After a 2-for-1 stock split, an individual investor who had owned 1,000 shares might be elated at the prospect of suddenly being the owner of 2,000 shares. However, every stockholder’s number of shares has doubled—causing the value of each share to be worth approximately half of what it was before the split. If a corporation had 100,000 shares outstanding, a stockholder who owned 1,000 shares owned 1% of the corporation (1,000 ÷ 100,000). After a 2-for-1 stock split, the same stockholder still owns just 1% of the corporation (2,000 ÷ 200,000).

What are the benefits of a stock split?

For example, if Grandma’s Girls declared a 3‐for‐1 stock split instead of a 10% stock dividend, the company would issue three shares in place of every one share currently held. After the split occurs, the par value or stated value is divided by 3 (because it is a 3‐for‐1 stock split) to determine the new par or stated value, and the number of outstanding shares is multiplied by 3. After the stock split, the new par value is $1 ($3 ÷ 3) and the number of outstanding shares is 1,500,000 (500,000 × 3). The total par value of the common stock remains at $1,500,000 (1,500,000 shares × $1 par value).