Sometimes a corporation wants to reward shareholders but needs to keep its cash, perhaps to open new stores. It can give them more shares instead. Other times its share price has climbed so high that a single share costs more than many small investors want to pay, so it divides each share into several cheaper ones. Both moves hand out pieces of paper, not cash, and both leave each shareholder owning exactly the same fraction of the company. The accounting shows why: one moves dollars between equity accounts, and the other changes nothing but a share count.
Recording a small stock dividend
A stock dividend is a distribution of additional shares of the corporation's own common shares to its common shareholders, in proportion to what they already own. A 10% stock dividend gives one new share for every ten held. For a small stock dividend (commonly under about 20% to 25% of the shares outstanding), the amount transferred out of retained earnings is usually the market value of the new shares on the declaration date, because that is what shareholders would see as the value of what they received. On Mar. 15, 2027, Maple Ridge (47,000 common shares outstanding) declared a 10% stock dividend when the shares were worth $14, to shareholders of record Apr. 1, distributed Apr. 15.
| Date | Account | Debit | Credit |
|---|---|---|---|
| 2027 Mar. 15 | Retained Earnings (or Stock Dividends) | $65,800 | |
| Common Stock Dividends Distributable | $65,800 | ||
| Declared 10% stock dividend: 4,700 shares at market value of $14 | |||
| Apr. 1 | No entry: date of record | ||
| Apr. 15 | Common Stock Dividends Distributable | $65,800 | |
| Common Shares | $65,800 | ||
| Issued 4,700 common shares as a stock dividend |
Stock splits and reverse splits
In a stock split, the corporation replaces each old share with several new ones. In a 2-for-1 split, a shareholder with 100 shares ends up with 200. Because Canadian shares have no par value, nothing moves between accounts: Common Shares keeps the same balance and is simply spread over more shares. So a split needs no journal entry, only a memorandum entry noting the new number of shares. On Sept. 30, 2027, Maple Ridge split its common shares 2-for-1, so its 51,700 shares became 103,400, and Common Shares stayed at $573,400. Its average issue price fell from about $11.09 to about $5.55, and the market price should roughly halve too.
A reverse split (called a share consolidation in Canada) works the other way: a 1-for-5 consolidation turns every five shares into one. Companies whose share price has fallen very low sometimes consolidate to raise the price per share, for example to meet a stock exchange's minimum price or to look less speculative. Like a split, it needs only a memorandum entry.