Stock dividend journal entry: What it is and how to record it
- What is a stock dividend?
- Types of stock dividends
- How to write a stock dividend journal entry
- Practical example: Recording a stock dividend
- Impact on financial statements
- Stock dividends vs. cash dividends: Key differences
- Common mistakes to avoid
- Why do accurate stock dividend entries strengthen financial reporting?
A stock dividend is a distribution of a company’s shares to shareholders in proportion to their current holdings instead of paying cash. Companies often choose stock dividends to preserve cash and manage the market price of shares. Recording the stock dividend journal entry reclassifies equity by moving amounts from retained earnings to paid-in capital; total equity stays the same and the change flows through your financial statements.
What is a stock dividend?
Stock dividends are distributions of additional shares of stock to existing shareholders, issued in proportion to the number of shares they already own. Instead of receiving cash, shareholders gain more stock, which increases their holdings without changing the company’s overall market value.
Stock dividends allow companies to retain cash while still rewarding investors. They’re often used by businesses that want to reinvest profits into operations while still providing value to shareholders. These dividends are typically expressed as a percentage. For example, a 10% stock dividend means a shareholder with 1,000 shares would receive an additional 100 shares.
Stock dividends differ from cash dividends, which are cash payments made to investors. There is no cash outflow, so your company’s cash balance remains the same while increasing your shareholders’ outstanding shares.
Why do companies issue stock dividends?
Issuing stock dividends is not a routine procedure. These are issued less frequently and often in response to specific financial strategies or market conditions.
- Conserve cash for critical business needs: Stock dividends allow companies to retain cash for operating expenses, capital projects, or debt repayment. Instead of reducing available funds, they can redirect earnings into expansion, hiring, or research and development.
- Avoid taking on new debt: Issuing new shares through stock dividends provides a way to share profits without increasing liabilities. It keeps the company’s balance sheet cleaner and avoids interest payments that come with borrowed capital.
- Boost market liquidity and attract investors: When more shares are in circulation, trading activity often increases. This can make the stock more appealing to investors, and increased liquidity can help stabilize the stock's price and reduce volatility over time.
- Reward shareholders while maintaining flexibility: Stock dividends let companies provide value without committing to recurring cash payouts. For companies in uncertain markets or early growth stages, this approach avoids setting an expectation of regular cash dividends that may be hard to sustain.
- Signal confidence in future performance: Companies that issue stock dividends are often signaling optimism. It suggests that they anticipate earnings growth and a rising stock value, which can enhance investor confidence.
Issuing stock dividends increases the number of shares held by shareholders, and so it increases the total shares outstanding in the market. However, there’s no change in total equity. They represent a non-cash reallocation within the total equity and not a change in value.
Types of stock dividends
Stock dividends are typically categorized as either small or large, depending on the percentage of new shares issued. The classification helps determine how the dividends are recorded in your balance sheet. Let’s dig a little deeper into each category:
Small stock dividends (less than 20–25%)
When a company issues additional shares to shareholders in an amount that is less than 20 to 25 percent of shares outstanding, this is known as a small stock dividend. For example, if a shareholder owns 100,000 shares and the company issues a 10% stock dividend, the shareholder receives 10,000 additional shares.
These dividend payments are recorded at the fair market value of the shares on the date of declaration. The journal entry reduces retained earnings by the full market value of the new shares and increases both the common stock account and additional paid-in capital in equal amounts.
Small stock dividends are more like earnings distributions. This means that they are quite similar to cash dividends in economic effect, but are paid in shares.
Large stock dividends (greater than 20–25%)
A large stock dividend is when a company issues additional shares to shareholders in an amount that is greater than 20 to 25 percent of shares outstanding. So, if a shareholder owns 100,000 shares and the company issues a 30% stock dividend, the shareholder receives 30,000 additional shares.
They are recorded at par value or stated value only. These dividends are viewed more like a stock split, to increase the number of shares and lower the market price. The accounting reflects that the company is simply restructuring its equity, not distributing value.
How to write a stock dividend journal entry
Stock dividend journal entries are typically created by accountants, controllers, or finance team members responsible for maintaining the general ledger. These professionals ensure that the equity section of the balance sheet accurately reflects the issuance of new shares without affecting total equity or overstating retained earnings.
Declaration date entry
Once a stock dividend is announced and approved by the board of directors on the declaration date, a journal entry is created to reclassify equity, reducing retained earnings and increasing paid-in capital.
So, let’s say you currently own 50,000 shares. The board has announced a stock dividend of 5%, equivalent to 2,500 shares, with a par value of $1 per share and a market value of $10 per share.
This is what the stock dividends declared journal entry looks like:
| Account | Debit | Credit |
|---|---|---|
| Retained earnings | $25,000 | |
| Stock dividend distributable | $2,500 | |
| Paid-in capital | $22,500 |
The retained earnings are debited for the market value (2,500 * $10), the stock dividend distributable represents the par value of the shares (2,500 * $1), and the paid-in capital is the difference between the two.
Distribution date entry
The distribution date is when the shares are actually distributed to shareholders. In your journal entry, the stock dividend distributable account is debited and credited to the common stock account.
Using the same example as above, here is what that stock dividend payment journal entry looks like:
| Account | Debit | Credit |
|---|---|---|
| Stock dividend distributable | $2,500 | |
| Common stock | $2,500 |
This demonstrates that there’s no change to total equity, as the amount is simply reallocated.
Practical example: Recording a stock dividend
Assume your company has 50,000 shares outstanding. The board declares a 10% stock dividend (5,000 new shares). Par value is $2 per share and market value is $10 per share at the declaration date.
Declaration (small dividend)
| Account | Debit | Credit |
|---|---|---|
| Retained earnings | $50,000 | |
| Stock dividend distributable | $10,000 | |
| Paid-in capital | $40,000 |
(Retained earnings debited for market value: 5,000 * $10 = $50,000. Par value to distributable: 5,000 * $2 = $10,000. Excess to Paid-in capital: $40,000.)
Distribution (small dividend)
| Account | Debit | Credit |
|---|---|---|
| Stock dividend distributable | $10,000 | |
| Common stock | $10,000 |
Balance sheet (before vs. after)
| Equity | Before | After |
|---|---|---|
| Common stock | $100,000 | $110,000 |
| Paid-in capital | $300,000 | $340,000 |
| Retained earnings | $500,000 | $450,000 |
| Total shareholders’ equity | $900,000 | $900,000 |
While the stock, paid-in capital, and retained earnings numbers change, the total equity remains the same.
Impact on financial statements
When stock dividends are issued instead of cash, they don’t change the total value of shareholders’ investments or the company’s overall equity. However, they do affect the company’s financial statements and influence shareholder considerations. Understanding these impacts can help you interpret a company’s financial position.
Effect on the balance sheet
Issuing stock dividends distributes additional shares to shareholders instead of cash, which reduces retained earnings because the dividends are treated as a distribution of the company's profits. For small stock dividends, the decrease is based on market value of the shares, while for large stock dividends, the decrease is based on the par value.
On a balance sheet, the value of the shares is transferred from retained earnings to paid-in capital accounts, like common stock or additional paid-in capital (APIC). This shifts components within equity, but doesn’t impact total assets or liabilities.
Total equity remains unchanged, as no new value is created or distributed. Stock dividends just represent a reallocation of equity. The increase in paid-in capital exactly offsets the decrease in retained earnings.
Effect on shareholders
Stock dividends are issued proportionally to all shareholders, so individual ownership percentages remain unchanged. For example, if you owned 2% before the dividends, you’ll still own 2% after, even if the number of shares increases.
Typically, the price per share decreases. This reflects a higher number of outstanding shares while the company’s total market value remains the same. A 5% stock dividend will likely result in a 5% decrease in the price per share.
Because shareholders don’t receive cash, stock dividends are not immediately taxable. Since the cost basis per share is adjusted, there may be future capital gains or losses when shares are sold. Tax regulations vary by jurisdiction; consult a tax professional for your specific situation.
Stock dividends vs. cash dividends: Key differences
Stock dividends and cash dividends serve the same purpose: to reward shareholders. However, they operate in fundamentally different ways. Stock dividends don’t affect cash flow because they reclassify equity. Cash dividends create a real cash outflow, reducing cash and appearing as a financing activity on the cash flow statement. Companies tend to favor stock dividends when signaling growth or preserving cash, while cash dividends are common when reserves are strong and the goal is to reward shareholders immediately.
| Feature | Stock dividend | Cash dividend |
|---|---|---|
| Form of payment | Additional shares | Cash payments |
| Retained earnings | Decreases | Decreases |
| Paid-in capital | Increases | No change |
| Total equity | No change | Decreases |
| Investor appeal | Often signals growth/reinvestment plans | Attracts income-focused investors |
| Tax treatment | Often not taxed until sale (jurisdiction) | Taxable in the year received |
| Common use | Growth-focused or cash-constrained firms | Mature, cash-rich companies |
Common mistakes to avoid
Accounting for stock dividends can feel tricky. But getting it right is crucial for maintaining accurate financial records, adhering to financial accounting standards, and ensuring shareholder transparency.
These are some of the most common mistakes:
- Recording stock dividends incorrectly in journal entries: For example, misclassifying accounts, forgetting to credit paid-in capital, or debiting cash instead of retained earnings
- Confusing fair value with par value: Make sure you use the correct valuation based on the stock dividend
- Recording dividends too early or too late: Always record journal entries on the declaration date when the board announces the dividend and on the distribution date when new shares are issued
- Confusing stock dividends and stock splits: Stock dividends require journal entries because they reallocate equity. Stock splits typically don’t because they increase shares and reduce par value.
Stock dividend journal entries should always be recorded carefully to avoid common mistakes and ensure accurate and transparent financial reporting.
Why do accurate stock dividend entries strengthen financial reporting?
Stock dividends may not involve cash but they still carry weight on the balance sheet. Accurate journal entries ensure that equity accounts reflect the true structure of ownership without overstating retained earnings.
Ramp helps finance teams get this right. With AI-powered categorization, customizable accounting rules, and real-time ERP integrations, Ramp ensures stock dividend transactions are consistently coded and automatically mapped to the right GL accounts. Teams can apply rules across entities, bulk-edit entries during close, and reduce manual effort without sacrificing accuracy.
When entries are accurate, your reporting stays reliable, strengthening trust among your team, auditors, and the market.
FAQs
Stock dividends do not impact the cash flow statement. Since no cash is exchanged, they don’t appear under operating, investing, or financing activities. The only financial statement affected is the balance sheet.
Stock dividends increase the number of shares each shareholder owns proportionally, so ownership percentages and voting power remain unchanged. No one gains or loses influence as a result of the dividend.
Stock dividends are typically issued to common shareholders. If preferred shareholders are eligible, the company must explicitly state this in its corporate charter or dividend policy. It’s not a standard practice.
A 2-for-1 stock split doubles the number of a company's outstanding shares by issuing one additional share for every share held. While the share count increases, the total value of each shareholder’s investment remains the same because the share price is halved. Unlike stock dividends, a stock split does not affect retained earnings or trigger a journal entry that reallocates equity.
Treasury stock refers to shares a company has repurchased and holds internally. These shares are no longer considered outstanding, don’t carry voting rights, and aren’t eligible for dividends. Treasury stock reduces total shareholders’ equity and is recorded as a contra-equity account on the balance sheet. Cumulative preferred stock, on the other hand, gives shareholders the right to receive all unpaid dividends before any dividends are issued to common shareholders.
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