What is stock split?
2. Accounting for stock splits
A stock split does not affect stockholders’ equity accounting (e.g., paid-in capital, retained earnings, and total stockholders’ equity), and as the result, there is no need to journalize a stock split. In other words, a stock split does not result in a journal entry.
As mentioned earlier, a stock split increases the total number of shares outstanding and decreases the par value per share in the same proportion. For example, in a 2-for-1 split, one share of $20 par value stock is exchanged for two shares of $10 par value stock. To see the result of different stock splits, refer to the table below:
Stock |
Shares |
Par Value |
Total par Value |
Shares |
Par Value |
Total par |
2-for-1 |
100,000 |
$20 |
$2,000,000 |
200,000 |
$10 |
$2,000,000 |
4-for-1 |
100,000 |
$20 |
$2,000,000 |
400,000 |
$5 |
$2,000,000 |
5-for-1 |
100,000 |
$20 |
$2,000,000 |
500,000 |
$4 |
$2,000,000 |
Another illustration of a stock split is presented below: it shows an effect of a 4-for-1 stock split as an example.
Before 4-for-1 |
After 4-for-1 |
|
Stockholders’ equity: |
||
Common stock |
2,000,000 |
2,000,000 |
Paid-in capital in excess of par value |
1,000,000 |
1,000,000 |
Total paid-in capital |
3,000,000 |
3,000,000 |
Retained earnings |
500,000 |
500,000 |
Total stockholders’ equity |
3,500,00 |
3,500,000 |
Shares outstanding |
100,000 |
400,000 |
Par value per share |
$20 |
$5 |
As we can see from the illustration above, a stock split does not affect stockholders’ equity accounts or the total capitalization of an entity. It only increases the number of shares outstanding and decreases par (or stated) value per share.
- What are the budget types in accounting?
- What are retained earnings?
- What is par value of a stock?
- Corporate financial statements and reports (Part I)
- Corporate financial statements and reports (Part II)
- Cost of capital (Part I) – Theory and concepts
- Cost of capital (Part II) – Practical applications