When it comes to dividends and liquidation, the owners of preferred stock have preferential treatment over the owners of common stock. In other words, preferred stockholders receive their dividends before the common stockholders receive theirs. If the corporation does not declare and pay the dividends to preferred stock, there cannot be a dividend on the common stock. In return for these preferences, the preferred stockholders usually give up the right to share in the corporation’s earnings that are in excess of their stated dividends. Since every stockholder will receive additional shares, and since the corporation is no better off after the stock dividend, the value of each share should decrease. In other words, since the corporation is the same before and after the stock dividend, the total market value of the corporation remains the same.

The decision to issue dividends is made by a company’s board of directors. The issuance of bonus shares is a strategy to encourage shareholders—investors get a healthy return, and the company does not have to part with capital. Capital stock is a term that encompasses both common stock and preferred stock. Paid-in capital (or contributed capital) is that section of stockholders’ equity that reports the amount a corporation received when it issued its shares of stock. At the date the board of directors declares dividends, the company can make journal entry by debiting dividends declared account and crediting dividends payable account.

A large stock dividend (generally over the 20-25% range) is accounted for at par value. If the stock dividend declared is more than 20%-25% of the existing common stock, it is considered a large stock dividend and its accounting treatment is more like a stock split. At the time of issuance, the stock dividends distributable are debited and common stock is credited. Large stock dividends do not result in any credit to additional paid-up capital.

This transparency helps investors and stakeholders better understand the company’s strategic decisions and their implications. Companies operating in multiple jurisdictions must navigate these differences to ensure compliance and accurate financial reporting, often requiring the expertise of international accounting professionals. For instance, if an investor holds 100 shares of a company and receives 10 additional shares as a stock dividend, the cost basis of the original 100 shares is spread across the new total of 110 shares. This adjustment lowers the per-share cost basis, which can result in higher capital gains when the shares are sold, assuming the sale price exceeds the adjusted basis. It’s important for investors to keep detailed records of these adjustments to accurately report capital gains or losses. In this journal entry, there is no paid-in capital in excess of par-common stock as in the journal entry of small stock dividend.

Cash Dividends on Common Stock

The key difference is that small dividends are recorded at market value and large dividends are recorded at the stated or par value. A stock dividend refers to bonus shares paid to shareholders instead of cash. Generally these omitted dividends were not declared and, therefore, do not appear on the corporation’s balance sheet as a liability. A current liability account that reports the amounts of cash dividends that have been declared by the board of directors but not yet distributed to the stockholders.

The record date merely determines the names of the stockholders that will receive the dividends. Dividends are paid only on outstanding shares of stock; no dividends are paid on the treasury stock. Even though the total amount of stockholders’ equity remains the same, a stock dividend requires a journal entry to transfer an amount from the retained earnings section to the paid-in capital section. The amount transferred depends on whether the stock dividend is (1) a small stock dividend, or (2) a large stock dividend. Rather, it is the distribution of more shares of the corporation’s stock. Perhaps a corporation does not want to part with its cash, but wants to give something to its stockholders.

In the case of noncumulative preferred stock, only its current year dividend needs to be paid in order for a corporation to pay a dividend to its common stockholders.
This value is then transferred from retained earnings to the common stock and additional paid-in capital accounts.
Stock dividends are a powerful tool for companies to reward shareholders, manage capital structure, and signal confidence in their future prospects.
However, sometimes the company does not have a dividend account such as dividends declared account.

In this article, we’ll cover common journal entries for stock dividends under GAAP. Stock dividends are a method by which companies reward their shareholders. Instead of distributing cash, companies issue additional shares of stock. This approach can be particularly attractive for companies looking to conserve cash while still providing value to their investors.

For small stock dividends, the value is based on the fair market price of the shares on the declaration date.
Rather, it is the distribution of more shares of the corporation’s stock.
The journal entry reflects the transfer from Retained Earnings to Common Stock Dividends Distributable based on the par value of the shares to be distributed.
If a state requires a par value, the value of common stock is usually an insignificant amount that was required by state laws many years ago.

Notice that it is reported separately from retained earnings and separately from paid-in capital. Dividends declared account is a temporary contra account to retained earnings. The balance in this account will be transferred to retained earnings when the company closes the year-end account. 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. The accounting reflects that the company is simply restructuring its equity, not distributing value.

Issuing Stock, Stock Dividends, and Stock Splits

These differences in accounting treatment highlight the importance of accurately categorizing and valuing stock dividends according to GAAP guidelines to ensure precise financial reporting. A stock dividend distributes shares so that after the distribution, all stockholders have the exact same percentage of ownership that they held prior to the dividend. There are two types of stock dividends—small stock dividends and large stock dividends.

Statement of Stockholders’ Equity

They’re often used by businesses that want to reinvest profits into operations while still providing value to shareholders. Similar to the cash dividend, the stock dividend will reduce the retained earnings at the year-end. However, as the stock usually has two values attached, par value and market value, it considered less straightforward than the cash dividend transaction. Stock dividends are often used by companies with limited cash reserves or those that prefer to reinvest their earnings into the business rather than paying out cash dividends. Understanding these entries helps clarify how each type of transaction affects a company’s financial statements and equity structure.

The date of declaration is the date on which the dividends become a legal liability, the date on which the board of directors votes to distribute the dividends. Cash and property dividends become liabilities on the declaration date because they represent a formal obligation to distribute economic resources (assets) to stockholders. On the other hand, stock dividends distribute additional shares of stock, and because stock is part of equity and not an asset, stock dividends do not become liabilities when declared. The answer is not in the financial statement impact, but in the financial markets. Since the same company is now represented by more shares, one would expect the market value per share to suffer a corresponding decline. For example, a stock that is subject to a 3-1 split should see its shares initially cut in third.

Outstanding shares

Members of a corporation’s board of directors understand the need to provide investors with a periodic return, and as a result, often declare dividends up to four times per year. However, companies can declare dividends whenever they want and are not limited in the number of annual declarations. They are not considered expenses, and they are not reported on the income statement.

Accounting for Cash Dividends When Only Common Stock Is Issued

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 large stock dividend journal entry issued relative to the total number of outstanding shares. Stock dividends represent a unique way for companies to reward their shareholders without expending cash. Instead of distributing profits in the form of cash, firms issue additional shares.

Dividend declared journal entry

The increase in the number of outstanding shares does not dilute the value of the shares held by the existing shareholders. The market value of the original shares plus the newly issued shares is the same as the market value of the original shares before the stock dividend. For example, assume an investor owns 200 shares with a market value of $10 each for a total market value of $2,000. When a company declares a stock dividend, it must record the transaction through specific journal entries to ensure accurate financial reporting. The process begins with the declaration date, where the company announces its intention to issue additional shares. At this point, the company records a debit to retained earnings and a credit to common stock dividends distributable.