Example

Z Ltd. has 2 million of $10 par value common stock issued and outstanding which is currently trading at $300 per share. The management believes that the share price is too high and it intends to reduce it to its 1/3.

The company would need to issue a 3-for-1 stock split which means that for each of currently issued common shares the company shall issue 3 shares. It will increase the total number of shares issued and outstanding to 6 million (2 million × 3) resulting in a par value of $3.33 ($10 ÷ 3) and a market price of $100 ($300 ÷ 33).

It will not affect balance in any of the accounts.

15) Accounting For Stockholders' Equity

A corporation's balance sheet reports its assets, liabilities, and stockholders' equity. Stockholders' equity is the difference (or residual) of assets minus liabilities.

Stockholders' Equity  =  Assets  –  Liabilities

Because of the cost principle (and other accounting principles), assets are generally reported on the balance sheet at cost (or lower) amounts. As a result, it would be incorrect to assume that the total amount of stockholders' equity is equal to the current value, or worth, of the corporation. (For a more thorough discussion of the balance sheet, see Explanation of Balance Sheet.)

Because of legal requirements, the stockholders' equity section of a corporation's balance sheet is more expansive than the owner's equity section of a sole proprietorship's balance sheet. (For example, state laws require that corporations keep separate in their records the amounts received through investors from the amounts earned through business activity.) State laws may also require that the par value be reported in a separate account.

Below are the items that a corporation is required to report on its balance sheet in the stockholder's equity section. We will discuss them in the order they would appear on a balance sheet:

1. Paid-in Capital (also referred to as Contributed Capital)

2. Retained Earnings

3. Treasury Stock

4. Accumulated Other Comprehensive Income

16) Paid-in Capital or Contributed Capital

Capital stock is a term that encompasses both common stock and preferred stock. "Paid-in" capital (or "contributed" capital) is that section of stockholders' equity that reports the amount a corporation received when it issued its shares of stock.

State laws often require that a corporation is to record and report separately the par amount of issued shares from the amount received that was greater than the par amount. The par amount is credited to Common Stock. The actual amount received for the stock minus the par value is credited to Paid-in Capital in Excess of Par Value.

To illustrate, let's assume that a corporation's common stock has a par value of $0.10 per share. On March 10, 2012, one share of stock is issued for $13.00. (The $13 amount is the fair market value based on supply and demand for the stock.) The accountant makes a journal entry to record the issuance of one share of stock along with the corporation's receipt of the money (note that the "Common Stock" account reflects the par value of $0.10 per share):

Date	Account Name	Debit	Credit
March 10, 2012	Cash	13.00
	Common Stock		0.10
	Paid-in Capital in Excess of Par Value		12.90

While some states require a par value for common stock, other states do not. If there is no par value, some states require a "stated value." If this is the case, the entry will be the same as the above except that the term "stated" will be used in place of the term "par":

Date	Account Name	Debit	Credit
March 10, 2012	Cash	13.00
	Common Stock		0.10
	Paid-in Capital in Excess of Stated Value		12.90

If a state does not require a par value or a stated value, the entire proceeds will be credited to the Common Stock account:

Date	Account Name	Debit	Credit
March 10, 2012	Cash	13.00
	Common Stock		13.00

Generally speaking, the par value of common stock is minimal and has no economic significance. However, if a state law requires a par (or stated) value, the accountant is required to record the par (or stated) value of the common stock in the account Common Stock.