Does a Stock Dividend Increase or Decrease Assets and Liabilities?
Original post by Cam Merritt of Demand Media
A stock dividend has no effect on either the assets or the liabilities of the company declaring the dividend. The only part of the balance sheet affected by a stock dividend is stockholders' equity -- and even there, the effect is that money merely moves from one account to another, with no change in the overall value of the company.
Cash vs. Stock Dividends
Corporations pass along profits to their stockholders as dividends. Often, companies pay dividends in cash, with stockholders receiving a certain amount for each share they own. Sometimes, though, a company's board of directors will want to reward the stockholders but is reluctant to part with cash, which the company may need for other things. The alternative is a stock dividend, in which shareholders receive additional shares of stock in proportion to the amount they already hold. In a 15-cents-per-share cash dividend, for example, someone who owns 300 shares would receive $45. In a 15 percent stock dividend, someone who owns 300 shares would receive 45 more shares.
Cash Dividend Accounting
When a company pays a cash dividend, the total amount of the dividend gets subtracted from the "cash" account on the asset side of the balance sheet. There has to be a matching deduction on the opposite side of the balance sheet, which is made up of liabilities and stockholders' equity. On this side, the value of the deduction comes out of the "retained earnings" account under stockholders' equity. Retained earnings represents all the profit the company has held onto in its history. Cash dividends are distributions of profits, so it makes sense that they'd come out of this account. The liabilities section, meanwhile, is unaffected.
Stock Dividend Accounting
When a company pays a stock dividend, a simple way to describe what's going on is that the company is "buying" additional shares of stock and then giving them to the shareholders. The cost of the shares comes out of retained earnings, just like the cost of a cash dividend. However, that money doesn't go to shareholders. Rather, it goes back to the company -- to purchase the shares that will be distributed to shareholders. On the balance sheet, the money that came out of retained earnings is merely shifted to another section of stockholders' equity, "paid-in capital," which represents money the company has made from selling its stock. Since there is no net change in stockholders' equity, no corresponding change is necessary in either assets or liabilities.
Resemblance to Stock Split
A stock dividend in some ways resembles a stock split, in which a company increases the number of its shares in circulation without changing the overall value of the company. In a 2-for-1 split, for example, every share of company stock is replaced with two shares, each at half the price of the original. The difference is that in a stock dividend, stockholders receive additional shares of the same stock, while in a split, stockholders' shares are replaced with new shares. In a split, no money is shifted from retained earnings to paid-in capital because that new stock isn't being "bought"; the old stock is simply being traded in for a larger quantity of new stock with an equal total value.
- "Financial Accounting for MBAs," Fourth Edition; Peter Easton et al; 2010
- AccountingCoach; Stockholders' Equity - Stock Splits and Stock Dividends; Harold Averkamp
About the Author
Cam Merritt has been a professional writer and editor since 1992, specializing in articles about spectator sports, personal finance and law. He has produced content for "USA Today," "The Des Moines Register" and the "Better Homes and Gardens" family of magazines and websites. Merritt has a Bachelor of Arts in journalism from Drake University.