# What are Stock Splits? A stock split occurs when a corporation’s board of directors decides to divide one share of stock into multiple shares. For example, a two-for-one stock split means that one share becomes two shares.

## Why Do Corporations Do Stock Splits?

One of the major objectives for a corporation to do a stock split is to reduce the market price of its shares. By reducing the market price, the corporation may attract new investors interested in owning stock at the decreased price.

## How to Calculate Stock Splits

Example: The Board of Directors for Terrance Inc, is considering declaring a stock split for its 100 shares of \$30 par common stock. Under each scenario, what is the effect on par value?

To calculate the number of shares after a stock split:

Step 1: Find the ratio of the split:

• 2 for 1 = 2/1 = a ratio of 2
• 3 for 1 = 3/1 = a ratio of 3
• 3 for 2 = 3/2 = a ratio of 1.5
• 4 for 1 = 4/1 = a ratio of 4
• 5 for 1 = 5/1 = a ratio of 5

Step 2: Multiply the ratio by the original number of shares to find the new number of shares:

• 2 for 1 = ratio of 2 x 100 shares = 200 shares
• 3 for 1 = ratio of 3 x 100 shares = 300 shares
• 3 for 2 = ratio of 1.5 x 100 shares = 150 shares
• 4 for 1 = ratio of 4 x 100 shares = 400 shares
• 5 for 1 = 5/1 = ratio of 5 x 100 shares = 500 shares

To calculate the par value of shares after a stock split:

Step 1: Find the ratio of the split:

• 2 for 1 = 2/1 = a ratio of 2
• 3 for 1 = 3/1 = a ratio of 3
• 3 for 2 = 3/2 = a ratio of 1.5
• 4 for 1 = 4/1 = a ratio of 4
• 5 for 1 = 5/1 = a ratio of 5

Step 2: Divide the original par value by the ratio of the split:

• 2 for 1 = \$60 par value / ratio of 2 = \$30 par value
• 3 for 1 = \$60 par value / ratio of 3 = \$20 par value
• 3 for 2 = \$60 par value / ratio of 1.5 = \$40 par value
• 4 for 1 = \$60 par value / ratio of 4 = \$15 par value
• 5 for 1 = \$60 par value / ratio of 5 = \$12 par value

## How Do Stock Splits Effect Stockholders’ Equity?

A stock split does not effect the value of stockholders’ equity. A stock split increases the number of shares and decreases the par value of stock in the same proportion. Stockholders’ equity does not increase or decrease due to a stock split.

## What is the Journal Entry to Record a Stock Split?

The only journal entry needed to record a stock split is a memo or memorandum entry that records the new number of shares and the new par value. The memorandum entry is informational and is entered in the general journal. No debits or credits are involved since the overall equity amount is not increasing or decreasing. The only change is to the number of shares, not to the dollar amount of equity.

The following is an example of a memorandum entry to record a stock split.

“On May 31, 2025 a 3-for-1 stock split was declared for the common stockholders of record as of the end of the day on June 30, 2025. The stock split will result in the number of issued and outstanding shares of common shares increasing from 500,000 shares to 1,500,000 shares.”

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