Definition of a Stock Split
A stock split usually increases the number of shares of a corporation’s common stock with the intention of reducing the market price of each share of stock.
Example of a Stock Split
Assume that a corporation’s common stock has risen to $150 per share and there are 100,000 shares issued and outstanding. The board of directors would like the shares of common stock to be trading near $50. To achieve this, the board approved a 3-for-1 stock split. After the stock split there are 300,000 shares issued and outstanding. If an individual stockholder owned 10,000 shares or 10% of the 100,000 shares before the stock split, the stockholder will own 30,000 shares or 10% of the 300,000 shares after the stock split.
Journal Entries for a Stock Split
The only journal entry needed for a stock split is a memo entry to note that the number of shares has changed and that the par value per share has changed (if the stock has a par value). However, a typical journal entry (one with a debit and a credit) is not needed since the total dollar amounts for the par value and other components of paid-in capital and stockholders’ equity are not changed with a stock split.
