What account is credited when a stock dividend is declared?

When a company declares astock dividend, it means that it will distribute additional shares of its own stock to its existing shareholders. This is different from a cash dividend, where the company pays out cash to its shareholders. In this article, we will explore what account is credited when a stock dividend is declared.

What is a stock dividend?

A stock dividend is a distribution of additional shares of a company's stock to its existing shareholders. This is typically done as a way to reward shareholders and provide them with a greater ownership stake in the company. Stock dividends are usually expressed as a percentage, such as 5%, which means that for every 100 shares you own, you would receive an additional 5 shares.

What account is credited when a stock dividend is declared?

When a company declares a stock dividend, it must credit its stock dividend account. This account is a temporary equity account that is used to keep track of the stock dividend until it is distributed to shareholders. The amount credited to the stock dividend account is equal to the fair market value of the additional shares being distributed.

The stock dividend account is a contra-equity account, which means that it reduces the balance of the company's retained earnings account. This is because a stock dividend does not involve any cash being paid out to shareholders, and therefore does not affect the company's cash balance.

What are thetax implicationsof a stock dividend?

From a tax perspective, a stock dividend is generally not considered taxable income for shareholders. This is because the distribution of additional shares does not result in any cash being received by the shareholder. Instead, the shareholder's cost basis in the stock is adjusted to reflect the additional shares received.

However, if a shareholder chooses to sell some or all of their shares received through a stock dividend, they may be subject tocapital gainstaxes on any resulting gains. This is because the shareholder's cost basis in the stock has been adjusted to reflect the fair market value of the additional shares received.

Conclusion

When a company declares a stock dividend, it must credit its stock dividend account to keep track of the distribution of additional shares to shareholders. This account is a contra-equity account that reduces the company's retained earnings balance. From a tax perspective, a stock dividend is generally not considered taxable income for shareholders, but may result in capital gains taxes if the shareholder chooses to sell the additional shares.