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
Split

Shares
before
Split

Par Value
before
Split

Total par Value
before
Split

Shares
after
Split

Par Value
after
Split

Total par
Value after
Split

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
Stock Split

After 4-for-1
Stock Split

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.

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