What is stock split accounting? (2024)

Accounts divided into shares

Stock split accounting refers to the accounting adjustments made to a company's accounts and records when a stock split occurs. Keep in mind that a stock split does not change the total stock value of the company; it only changes the number of shares outstanding and the par value (if any) of those shares.

Here is a step-by-step overview of stock split accounting:

1. Journal entries: No actual journal entry is required for a general ledger stock split since the total equity of the company remains unchanged. However, a memorandum may be registered, if relevant, to document the change in the number of shares and par value.
2. Change in number of shares outstanding: After the stock split, the number of outstanding shares is adjusted based on the split ratio. For example, a 2-for-1 split would double the number of shares.
3. Adjustment of the nominal value: If the company's shares have a par value, this value is inversely adjusted to the split. For a 2-for-1 split, the nominal value per share is halved. For example, if a company had a par value of $1 per share before the split and after the split, the par value would be $0.50 per share. stock.
4. Transferred income: There is no change in retained earnings or any other stock account as a result of a stock split.
5. Capital accounts: If the company has different classes of shares, or if it has both par value and additional paid-in capital accounts, the structure of these accounts in terms of total value will remain the same, but the per share amounts will be adjusted.
6. Earnings per share (EPS): As the number of shares outstanding changes, previously reported EPS values ​​in the financial statements can be adjusted to reflect the split, ensuring comparability between periods.
7. Yield: If the company pays a dividend, future dividends will likely be adjusted to reflect the new number of shares. For example, if a company paid $1 per share before the split, it could pay $0.50 after a 2-for-1 split.
8. Information about annual accounts: The company's footnotes or notes to the annual accounts must provide information about the origin of the stock split, the relationship between the split and the number of shares affected.
9. Stock certificates: For companies that still issue physical stock certificates (although this is rare these days), existing shareholders will have to exchange their old certificates for new ones that reflect the increased number of shares resulting from the split.

It is critical to understand that from an accounting perspective, a stock split is a purely cosmetic change. The total value of equity remains the same; it is simply divided among a different number of shares.

Stock split accounting example

Let's look at a simplified hypothetical example to illustrate the accounting adjustments for the stock split.

Prestige Corp.:

• Details of pre-split warehouse:
  • Number of shares outstanding: 500,000
  • Par value per stock: $10
  • Stock price: $100
  • Common stock account (in the stock section): $5,000,000 (500,000 shares x $10 par value)
  • Retained earnings: $10,000,000

Prestige Corp. decides to do a 2-for-1 stock split.

Adjustments after the split:

• Parts excellent:
  • Pre-distributed: 500,000
  • Subdivision: 1,000,000 (500,000 x 2)
• By value:
  • Pre-split: $10
  • After the split: $5 (due to the 2-for-1 split, the face value is halved)
• Joint share account:
  • Despite the change in the number of shares and the nominal value, the total value of the joint share account remains the same.
  • Pre-split: $5.000.000 (500.000 delinger x $10)
  • After the split: $5,000,000 (1,000,000 shares x $5)
• Transferred income:
  • There is no change in this account as a result of the stock split.
  • Remains $10,000,000 both before and after the split.
• Earnings per share (EPS) and dividend:
  • Suppose Prestige Corp. reported earnings per share of $4 before the split. This would be adjusted to $2 after split for comparability.
  • As Prestige Corp. had a dividend of $2 per share before the split, future dividend declarations could be adjusted to $1 per share. parts after the split.

Memo input: Although no formal journal entry is made in the general ledger for the stock split, a memo can be added to record the event:

• “Prestige Corp. completed a 2-for-1 stock split on [specified date]. The number of outstanding shares doubled and the nominal value per share was halved."

Information about annual accounts: A comment is added in the annual or quarterly report:

• “On [specific date], Prestige Corp. completed a 2-for-1 stock split. As a result, all share and per-share amounts have been adjusted to reflect this split.”

Recall that the important thing about this example is that the number of shares outstanding and the par value per share changes remains Prestige Corp.'s total equity. the same. The stock split simply divides the shared pie into several, smaller slices without changing the overall value of the pie.