How does a stock dividend impact equity?
I’ve been looking into stock dividends and came across some information that I find a bit unclear. The text I’m reading explains that, on the declaration date of a small stock dividend, a journal entry is made to shift the market value of the shares being issued from retained earnings to the paid-in capital section of stockholders’ equity.
Source: AccountingCoach
Specifically, I’m confused about the journal entries that involve crediting the Common Stock Dividend Distributable account in one entry and then debiting it in another. Could someone help clarify what these entries mean?
Here’s the image I referenced:
One response
A stock dividend affects equity by reallocating amounts within stockholders’ equity rather than changing the total equity. When a stock dividend is declared, the company issues additional shares to its shareholders, increasing the number of shares outstanding.
Regarding the journal entries, here’s a clearer breakdown:
Declaration of the Dividend: When the small stock dividend is declared, the company recognizes that it will be issuing new shares. At that point, the company debits Retained Earnings for the market value of the shares being distributed (which represents the value being moved out of retained earnings) and credits Common Stock Dividend Distributable for the par value of the shares being issued.
Entry Example:
Issuance of the Dividend: Once the shares are actually distributed, the company then removes the liability of the dividends payable and credits Common Stock (for the total par value of the shares distributed).
Entry Example:
In summary, the debit to Retained Earnings reflects a reduction in retained earnings due to the issuance of additional shares, while the credits reflect the increase in equity from issuing new stock. The overall total equity does not change, but its composition shifts from retained earnings to paid-in capital. This is an important concept because it illustrates how stock dividends retain value within the company while giving shareholders more shares.