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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