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Accounting Impacts of a Stock Split & Stock Dividends

Original post by Kathy Adams McIntosh of Demand Media

Corporations rely on their shareholders to financially support their company. They support the company by purchasing stock from the company and by showing loyalty to the company and purchasing its products. Corporations track the number of shares outstanding in order to determine any changes resulting from stock transactions. These transactions include stock splits, reverse stock splits and stock dividends. Each of these transactions requires the accounting department to record the financial impact.

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Stock Split

A stock split occurs when a company increases the number of shares outstanding by multiplying each share by a factor. The company determines the factor by deciding how many shares of stock each investor will own after the split. The par value of the stock is divided by the factor. For example, a 3-for-1 stock split means that each investor will own three shares of stock for each individual share owned prior to the split. If the par value of the stock equaled $9 before the split, the par value equals $3 after the split. A stock split makes no impact on the financial records of the company. The accountant makes a note that adjusts the par value and the number of shares outstanding.

Reverse Stock Split

A reverse stock split occurs when the company decreases the number of shares outstanding by dividing each share by a factor. For example, a 1-for-2 reverse split means that each investor will own one share of stock for every two shares owned prior to the reverse split. If the par value of the stock equaled $2 before the reverse split, the par value equals $4 after. Like a normal stock split, a reverse stock split makes no impact on the financial records of the company.

Small Stock Dividend

Stock dividends occur in two ways. A small stock dividend occurs when the company issues a dividend that equals less than 25 percent of the outstanding shares. When the company declares the dividend, the accountant records this in the financial records based on the market price of the stock on the date the dividend was declared. The accountant increases stock dividend distributable for the par value of the stock to be issued, and paid-in capital for the difference between the market value and the par value of the stock. The accountant decreases retained earnings for the total.

Large Stock Dividend

A large stock dividend occurs when the company issues a dividend that equals more than 25 percent of the outstanding shares. When the company declares the dividend, the accountant records this in the financial records using the par value of the stock on the date the dividend was declared. The accountant increases stock dividend distributable for the par value of the stock to be issued and decreases retained earnings for the total.


                   

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About the Author

Kathy Adams McIntosh started writing professionally in 2001. She has been published in "Cup of Comfort," "Community Connection" and "Wisconsin Christian News." Adams McIntosh belongs to the Fearless Freelancers and the Broadway Writers Guild. She earned her Master of Business Administration from the University of Wisconsin.


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