How do dividend distributions affect additional paid in capital?

Whether a dividend distribution has any effect on additional paid-in capital depends solely on what type of dividend is issued: cash or stock.

Additional paid-in capital is a subaccount of the paid-in capital section on a company's balance sheet. While the common stock subaccount reflects the par value of stock, additional paid-in capital includes the value of the issuance that exceeds that amount.

A cash dividend is simply a set amount the company pays its shareholders per owned share. For example, a shareholder who owns 50 shares and receives a 50 cent dividend per share receives a total of $25.

If a company decides to issue a cash dividend to its shareholders, the funds are deducted from its retained earnings, and there is no effect on the additional paid-in capital.

When a company issues a stock dividend, it rewards shareholders with additional shares of stock for each share they already own. An investor who owns 100 shares, for example, receives a total of 10 additional shares if the issuing company distributes a 10% stock dividend. A stock dividend results in an issuance equal to or less than 25% of outstanding shares.

When a company issues a stock dividend, an amount equivalent to the value of the issued shares is deducted from retained earnings and capitalized to the paid-in capital account. Basically, the common stock and additional paid-in capital subaccounts are increased just as they would be if new shares had been issued, except the increase is funded by the company's own equity rather than by investors.

Assume company ABC issues a stock dividend to common stockholders, resulting in a total issuance of 10,000 additional shares. Each share has a par value of $1 and a market price of $15. The total value of the shares, $150,000, is deducted from retained earnings. Of this amount, $10,000 is allocated to the common stock subaccount and the remaining $140,000 is allocated to additional paid-in capital.