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What is a stock split?

A stock split will increase the number of shares outstanding that a company has and will divide the par value by its split amount. Stock splits will not require a journal entry, but they will require a unique method of computation. The visual below illustrates the calculation to make to the number of outstanding shares.

Stock splits will really only increase the number of shares outstanding. Basically, if the company issues a 2-1 stock split, then the number of outstanding shares will double and the par value of the stock will be cut in half.

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  • What is a stock dividend?

    Stock dividends are issued by a company and increase the number of shares outstanding. Stock dividends are paid out of retained earnings, so a stock dividend would decrease retained earnings. However, common stock increases for the same amount, so the overall impact to total equity is $0. For example, if the company had common stock outstanding of 1,000 shares and they issued a 20% stock dividend, then they would be issuing another 200 shares of common stock to investors. This would be a debit to retained earnings to fund the increase in common stock outstanding.