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Stock Split Accounting

Stock Split Overview

A stock split involves the issuance of a multiple of the current number of shares outstanding to current shareholders.  For example, a one-for-two split of shares when there are currently 125,000 shares outstanding will result in a new amount outstanding of 250,000 shares.  This is done to reduce the market price on a per-share basis.  In addition, by dropping the price into a lower range, it can have the effect of making it more affordable to small investors, who may then bid up the price to a point where the split stock is cumulatively more valuable than the un-split stock.

A stock split is typically accompanied by a proportional reduction in the par value of the stock.  For example, if a share with a par value of $20 were to be split on a two-for-one basis, then the par value of the split stock would be $10 per share.  This transaction requires no entry on a company’s books.

A reverse stock split may also be accomplished if a company wishes to proportionally increase the market price of its stock.  For example, if a company’s common stock sells for $2.35 per share and management wishes to see the price trade above the $20 price point, then it can conduct a ten-for-one reverse split, which will raise the market price to $23.50 per share while reducing the number of outstanding shares by 90%.  In this case, the par value per share would be increased proportionally, so that no funds were ever removed from the par value account.

There is no accounting entry associated with a stock split, simply a notation in the financial statements that the number of shares has increased. However, if a split occurs without a change in the par value, then funds must be shifted from the additional paid-in capital account to the par value account.

Stock Split Example

Emmich Sports splits its 250,000 outstanding shares on a one-for-three basis, creating a new pool of 750,000 shares.  The existing par value per share of $2 does not change, so Emmich's accountant transfers $1,000,000 (the number of newly-created shares times the par value of $2) from the additional paid-in capital account to the par value account to ensure that the legally mandated amount of par value per share is stored there. The entry is:

 
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