The Difference Between Stock Slit and Stock Dividend

Date 24/09/11

The difference between stock slit and stock dividend

Stock dividend is a distribution of additional share of the corporation's own stock to its stockholders with out the receipt of any payment in return. Stock dividends dose not reduce a corporations asset and equity, but simply transfers a portion of equity from retained earnings to contributed capital. A stock dividend is declared by corporation's directors.

Stock dividends are declared and distributed for two reasons, first directors are said to use stock dividends to keep the market price of the stock affordable. Eg if a corporation continues to earn income but does not distribute it to shareholders through cash dividends, the price of its common stock likely increases. The price of such a stock may become so high that it discourages some investors from buying the stock (especially in lots of 100 and 1000). When a corporation declares a stock dividend, it increase the number of outstanding shares and lowers the per share price of its stock. Another reason for declaring a stock dividend is to provide evidence of management's confidence that the company is doing well and will continue to do well.

A stock dividend dose not affect assets or total equity, but it dose affect the components of equity. It does this by transferring part of retained earnings to contribute capital accounts, some times described as capitalizing retained earnings.

Stock split is the distribution of additional shares to stock holders according to their present ownership. when a stock split occurs, the corporation '' calls in'' its outstanding shares and issues more than one new share in exchange for each old share. Splits can be done in any ratio, including 2-for-1, 3-for-1 or higher. Stock split reduces the par or stated value per share.

The split stock does not affect any equity amount reported on the balance sheet or any individual stock holder's percent owner ship. Both contributed capital and retained earnings accounts are unchanged by a split, and no journal entry is made. The only effect on the accounts is a change in the stick account description.

Stock splits are recorded in the financial statement with out calling in the original shares and simply changing their par value. This type of 'split' is really a large stock dividend and results in additional shares issued to stockholders by capitalizing retained earnings or transferring other contributed capital to common stock.

Stock dividend does not affect assets or total equity, but it dose affect the components of equity while split stock does not affect any equity amount reported on the balance sheet. Both contributed capital and retained earning accounts are unchanged by split and no journal entry is made.