Par value is a term used when referring to a stated value of a stock. Par value does not necessarily correlate with the stock’s actual value. Stocks are sold at the value they are worth, not the par value. Typically when a par value of a stock changes, it changes because of a stock split. The total par value of the stock actually remains the same through a split, however, the par value of the stock gets split in half if it is a typical two-for-one split.
Determine the stock par value on the books. Stock is an equity account in a business and therefore has a normal credit balance. When stock is sold, the company’s cash account is debited to account for receiving cash, and the stock account is credited. The amount credited to the stock account is the number of shares times the par value. If the stock is sold at a higher amount than par value, the difference is placed in an account called Paid in Capital in Excess of Par Value.
Calculate the stock split. When par value changes on a stock, it is due to a stock split. Most of the time, a stock split is a two-for-one split. This means that the amount of shares outstanding is now doubled. If it is a three-for-one split, the amount of shares triples. If there are 1,000 shares of stock outstanding, after a two-for-one split, there are now 2,000 shares.
Calculate par value. If the par value of the original 1,000 shares was $10 a share, after a two-for-one split, the par value is decreased in half. When a split happens, the total par value of the stock remains the same. So before the split, the total par value of the stock was $10,000--1,000 shares times $10. After the split, the par value decreases to $5 a share. The total par value of the stock remains at $10,000--2,000 shares times $5.
Post a memorandum notation in the accounting records. When this happens, no journal entry is required because the financial amounts did not change. A notation in the records, however, is necessary. This notation is required so that investors and other stakeholders can see exactly what took place with the split. The notation is typically written as a footnote on the financial statements during the year it occurred.