Both small and large stock dividends cause an increase in common stock and a decrease to retained earnings. This is a method of capitalizing (increasing stock) a portion of the company’s earnings (retained earnings). After the distribution, the total stockholders’ equity remains the same as it was prior to the distribution. The amounts within the accounts are merely shifted from the earned capital account (Retained Earnings) to the contributed capital accounts (Common Stock and Additional Paid-in Capital). Prior to the distribution, the company had 60,000 shares outstanding.

Overview of GAAP Principles Related to Stock Splits

Do you remember playing the board game Monopoly when you were younger? At the time, you probably were just excited for the additional funds. Do you remember playing the board game Monopoly when you wereyounger? The choice of one or the other has little impact on the description of the firm’s financial position provided in the balance sheet. The purpose of these activities is generally to stimulate activity in the stock by reducing the trading value of each share, with the ultimate goal of increasing the total value of the shares.

Accounting for a Stock Split

Stock dividends may also impact EPS, but the adjustment process differs, reflecting the dividend’s effect on retained earnings. A stock split is a corporate action in which a company increases or decreases the number of its outstanding shares without changing the shareholders’ equity. This is achieved by adjusting the number of shares each shareholder owns, while the total market value of the shares remains the same as before the split. Stock splits are primarily executed to make shares more affordable and attractive to a broader base of investors, enhancing liquidity and marketability. A traditional stock split occurs when a company’s board of directors issue new shares to existing shareholders in place of the old shares by increasing the number of shares and reducing the par value of each share.

Common Issues and Errors in Recording Stock Splits

• The total capitalization (value of the shares outstanding) is $200,000 (10,000 x $20).
• Let’s summarize the advantages companies see when going through the hassle and expense of a stock split.
• Nochange to the company’s assets occurred; however, the potentialsubsequent increase in market value of the company’s stock willincrease the investor’s perception of the value of the company.
• Both types of stock dividends impact the accounts in stockholders’ equity.
• Both small and large stock dividends occur when a companydistributes additional shares of stock to existingstockholders.

Apple’s outstanding shares increased to over 15 billion, while the market capitalization continued to fluctuate, rising to over $3 trillion in September 2024. When a company performs a forward stock split, the process is seamless for shareholders. The additional shares are automatically credited to shareholders’ accounts by their brokers. You have just obtained your MBA and obtained your dream job with a large corporation as a manager trainee in the corporate accounting department.

In the long term, stock splits can influence investor perception and behavior. A forward split often creates a perception of increased accessibility and affordability, potentially leading to higher demand and an increase in stock price. Conversely, a reverse split might be perceived negatively if it’s seen as a move to prop up a failing stock, although it can also be interpreted as a strategic step to attract more serious investors. For example, in a 2-for-1 forward split, the stock price will be halved, whereas in a 1-for-2 reverse split, the stock price will double. This price adjustment ensures that the market capitalization of the company remains the same post-split. The purpose of this article is to provide a comprehensive guide on how to properly account for stock splits under GAAP.

FAR CPA Practice Questions: Capital Account Activity in Pass-through Entities

All we did was we split the stock into twice as much stock, but the par value per share has decreased to 10¢ per share and the market price has decreased to half as much as well, $20 market price. So why don’t you guys try the next one as a practice problem and see if you guys can figure out the new shares outstanding, new par value, and new market price and then test it in the next video. A stock split is when law firm accounting and bookkeeping service reviews a corporation reduces the par value of each share of stock outstanding and issues a proportionate number of additional shares. This does affect the number of shares outstanding and, therefore, the number of shares dividends will be paid on. It also may affect the par value and market price per share, reducing them proportionately. However, the total dollar value of the shares outstanding does not change.

A stock split causesno change in any of the accounts within stockholders’ equity. Theimpact on the financial statement usually does not drive thedecision to choose between one of the stock dividend types or astock split. Large stock dividends and stock splits are done inan attempt to lower the market price of the stock so that it ismore affordable to potential investors.

Companies may issue a memo to reflect these changes, but no formal accounting entry is needed. A stock split increases the number of shares outstanding by a specific ratio and proportionally reduces the par value per share. Unlike stock issuances or stock dividends, no journal entry is required for stock splits because they do not impact total equity—only the structure of shares and par value changes. A reverse stock split, as the name implies, is the opposite of a forward or normal stock split.