Mastering Accounting for Equity Under U.S. GAAP for the FAR CPA Exam
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Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
Equity represents the ownership interest in a company, and how a company accounts for equity transactions — stock issuance, dividends, and stock splits — is a well-tested topic on the FAR section of the CPA exam.
How do you account for stock issuance?
Issuing stock increases a company's equity.
Example: Company A issues 1,000 shares at $10 per share.
- Debit Cash $10,000
- Credit Common Stock $10,000
How do you account for cash dividends?
Cash dividends are direct cash payouts to shareholders, recorded in two steps: declaration, then payment.
Example: Company A declares a $1 dividend per share on its 1,000 outstanding shares ($1,000 total).
Declaring the dividend:
- Debit Retained Earnings $1,000
- Credit Dividends Payable $1,000
Paying the dividend:
- Debit Dividends Payable $1,000
- Credit Cash $1,000
How do you account for property dividends?
A property dividend distributes a non-cash asset to shareholders instead of cash. Before declaring it, the asset must first be restated to fair value, recognizing any gain or loss on that revaluation.
Example: Company A declares a property dividend of land with a $1,800 carrying value, now worth $2,000.
1. Revalue the land to fair value:
- Debit Land $200
- Credit Gain on Revaluation $200
2. Declare the dividend at fair value:
- Debit Retained Earnings $2,000
- Credit Dividends Payable $2,000
3. Distribute the land:
- Debit Dividends Payable $2,000
- Credit Land $2,000
How do you account for stock splits?
A stock split increases the number of shares outstanding and proportionally reduces the price per share — total market capitalization doesn't change.
Example: a 2-for-1 split. Company A has 1,000 shares at $10 per share.
- Before the split: 1,000 shares × $10 = $10,000
- After the split: 2,000 shares × $5 = $10,000
No journal entry is required for a stock split under U.S. GAAP.
What must be disclosed?
Equity-related disclosures are typically found in the notes to the financial statements, covering the types of stock issued, shares outstanding, dividends declared, and related activity.
Cash dividends move cash; property dividends first mark the asset to fair value. Stock splits don't touch the books at all — they just redivide the same total equity across more shares.
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Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 95 on FAR. He is the founder and sole instructor of Maxwell CPA Review, a complete CPA review course covering all six sections, where he creates every lecture, textbook and study outline himself.
