Stock dividend journal entry: What it is and how to record it

A stock dividend journal entry is the accounting record used to document the distribution of new shares to shareholders. It adjusts retained earnings and increases paid-in capital without affecting total equity. Stock dividends are a common way companies reward shareholders without using cash.

Unlike cash dividends, stock dividends don’t reduce a company’s assets. However, they do change its equity structure, which impacts financial reporting.

What are stock dividends?

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.

Unlike stock splits, stock dividends reduce retained earnings and increase paid-in capital on the balance sheet. They also dilute the share price, though the total value of a shareholder’s investment stays the same.

In 2023, over 86% of companies either increased dividends or maintained them, particularly in capital-intensive industries like energy, real estate, and manufacturing. These companies often favor stock dividends to maintain liquidity for expansion and debt management.

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.

• Preserve 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. This is especially important in industries with tight cash cycles or high investment needs.
• 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. That can make the stock more appealing to investors who prefer easily tradable positions. Greater liquidity can also help stabilize the price of the stock 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 shows they expect earnings growth and rising stock value, which can strengthen investor trust. The move reassures the market that leadership sees long-term potential and is investing for the future.

When companies issue stock dividends as part of a broader capital strategy, finance teams must ensure reporting remains clean and compliant. Ramp supports this by automating journal categorization and syncing updates in real-time, giving teams confidence in the numbers behind each strategic move.

Stock dividend vs. cash dividend

Stock dividends and cash dividends serve the same purpose of rewarding shareholders. However, they operate in fundamentally different ways. One adds more shares to a shareholder’s portfolio. The other puts money in their pocket. Cash dividends are much more popular and common than stock dividends.

Accounting implications of small vs. large stock dividends

Not all amounts of dividends are treated the same. Accounting rules separate them into small and large stock dividends, and that classification directly affects how companies record them in their books. The dividing line is based on the percentage of shares issued relative to the total number of outstanding shares.

Small stock dividends

Small stock dividends are less than or equal to 20–25% of outstanding shares. These dividend payments are recorded at the fair market value of the shares on the declaration date. The journal entry reduces retained earnings by the full market value of the new shares and increases both common stock account and additional paid-in capital.

For example, a company with 1 million shares declares a 10% stock dividend when shares are trading at $30. The $3 million fair value (100,000 shares X $30 per share) becomes the basis for the journal entry.

This approach reflects the idea that 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

Large stock dividends are greater than 25% of outstanding shares. They are recorded at par value or stated value only. These dividends are viewed more like a stock split, with the purpose of increasing the number of shares and lowering the market price.

For example, the same company declares a 35% stock dividend on 1,000,000 shares outstanding, and each share has a $1 par value. This means that only $350,000 is transferred from retained earnings to common stock.

In this case, no portion goes to additional paid-in capital. The accounting reflects that the company is simply restructuring its equity, not distributing value.

Accounting treatment of stock dividends

Stock dividends don’t affect a company’s total equity. However, they reallocate equity between retained earnings and paid-in capital. That shift has to be captured accurately to keep financial statements compliant and audit-ready.

Accounting starts on the declaration date when the board approves the dividend. The size of the stock dividend triggers the journal entry, which depends on the date.

For small stock dividends, the value is based on the fair market price of the shares on the declaration date. Retained earnings decrease by this amount, while shares of common stock increase by the par value of the new shares issued. The remaining balance goes to additional paid-in capital.

Large stock dividends follow a different rule. Instead of using market value, companies record the transaction at a par value only, with the full amount transferred from retained earnings to common stock. In this case, additional paid-in capital is not adjusted.

These changes stay within the equity section of the balance sheet and do not affect assets, liabilities, or net income statement . However, they do impact per-share metrics. Because stock dividends increase the number of shares outstanding, earnings per share are diluted—even though the company’s total earnings remain unchanged.

Ramp helps ensure these internal equity reallocations are captured cleanly and consistently across the general ledger. With bulk-edit features and customizable accounting rules, finance teams can process stock dividend adjustments more efficiently without manual overrides or inconsistent coding.

How to create 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 new shares' issuance without affecting total equity or overstating retained earnings.

• Step 1: Determine whether the stock dividend is small or large. Start by calculating the percentage of new shares relative to the total shares outstanding. If the dividend is 25% or less, it's classified as a small stock dividend. Anything above 25% is treated as a large stock dividend. This classification affects how the dividend is valued and which equity accounts are involved in the journal entry.
• Step 2: Identify the correct valuation method. If the dividend is small, use the stock's fair market value on the declaration date. This is the price the stock is trading at when the board approves the dividend. For large dividends, use the stock’s par value or stated value. The valuation method determines how much will be debited from retained earnings and how much will be credited to common stock and paid-in capital.
• Step 3: Calculate the number of shares to be issued. Multiply the total number of shares currently outstanding by the dividend percentage. For example, if a company has 2 million shares and declares a 10% stock dividend, it will issue 200,000 new shares. This number becomes the basis for calculating the total value of the dividend.
• Step 4: Compute the total dollar value of the dividend. Multiply the number of new shares by either the fair market value (for small dividends) or par value (for large dividends). If the dividend is small and the share price is $25, the value of a 200,000-share dividend is $5 million. If it’s a large dividend and the par value is $1, the total value would be $200,000.
• Step 5: Record the following journal entry. For a small stock dividend, reduce retained earnings by the full market value of the dividend. Increase common stock by the par value of the new shares. The difference between market value and par value goes to additional paid-in capital. For a large stock dividend, reduce retained earnings by the total par value and increase common stock by the same amount. No entry is made to additional paid-in capital for large dividends.
• Step 6: Update the financial statements and share count. After recording the entry, update the equity section of the balance sheet to reflect the reallocation from retained earnings to common stock and paid-in capital. Increase the number of shares outstanding to include the newly issued shares. This step also affects earnings per share since the denominator (shares outstanding) has grown, even though the numerator (net income) remains the same.
• Step 7: Include required disclosures in your financial statements. Financial reporting standards require you to explain the nature of the stock dividend in the footnotes. This includes the percentage issued, the number of shares distributed, the valuation method used, and the impact on equity. Proper disclosure ensures transparency for shareholders, auditors, and regulators.

Why do accurate stock dividend entries strengthen financial reporting?

Stock dividends may not involve cash but still carry weight on the balance sheet. Accurate journal entries ensure that equity accounts reflect the true structure of ownership without overstating retained earnings.

Poorly recorded stock dividends can lead to restatements, audit delays, and regulatory scrutiny. Equity-related misstatements often trigger comment letters from the SEC, especially when dividend thresholds are misjudged, or fair value is incorrectly applied.

Ramp helps finance teams manage this complexity. 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 journal entries are handled correctly and efficiently, financial reporting stays reliable. This reliability builds trust with internal stakeholders, auditors, and the market.