 A dividend is a distribution to stockholders on a proportional basis. The most common type of dividend is a cash dividend, but it could also be property or stock dividends as well. The focus of this video will be accounting for stock dividends. A stock dividend is a proportional distribution of a company's own stock. Although stockholders receive more shares, their ownership percentage remains the same. So let's answer the question, why stock dividends instead of cash dividends? The primary reason is to meet stockholders' expectations about receiving dividends without spending cash. Companies that are cash poor or saving cash for some other reason might do this. You can see a few other reasons listed on the slide. Accounting for stock dividends falls into two categories, depending on the size of the stock distribution. A small stock dividends are usually less than 25% of the issued stock. You will see an example of this size of dividends shortly. Large stock dividends are usually more than 25% of the issued stock and not covered in this video. Recording stock dividends is a two-step process. Step one is we need to calculate the number of new shares to be distributed, and step two is then recording the stock dividend journal entry. We calculate the new shares to be distributed by taking the issued shares times the declaration percentage. This equals the new shares. The journal entry to record the distribution of the new shares is a debit to retained earnings. This amount of this debit is the number of new shares times the market price. Common stock is then credited. Note that sometimes companies use an account called common stock distributable. If your course uses that, I would encourage you to review an example in your text because there's actually one extra journal entry you'll need to make. But the concept of accounting for stock dividends is the same as what I'm showing here. Anyway, common stock is credited for the number of new shares times the par value of the stock. Finally, pating capital in excess of par is credited for the difference. So let's look at an example. The Shins Corporation has a balance of $400,000 in retained earnings. It declares a 10% stock dividend on its 100,000 shares of $1 par value common stock. The current fair market value of the stock is $15 per share. You can see the equity section prior to the stock dividend declaration. So step one is determine the number of new shares to be distributed. In this case, that's $10,000 additional shares of stock. So retained earnings is debited for $150,000 which is the number of new shares 10,000 times the market price of the stock, $15. Common stock is credited for $10,000 which is the number of new shares 10,000 times the par value of the stock, $1. Finally pating capital in excess of par is credited for the difference which is $140,000. Let's compare the stockholders' equity section before and after the stock dividend. Notice that total stockholders' equity is still $900,000. All that's happened is 150,000 of retained earnings has moved from that section to the paid in capital section. So make sure you remember that stock dividends don't change total stockholders' equity like cash dividends do.