Why do Retained Earnings decrease when Stock dividends are issued?
Because the value of the new shares is transferred from retained earnings to contributed capital.
But issuing new shares decreases the value of the shares outstanding so the account should not change no?
The Common Stock account shows the shares issued at par value. So when the company issues new shares as a stock dividend, the par value of those new shares needs to be added to Common Stock.
Does the par value change or is it predetermined on the ipo?
It changes for stock splits. I’m not sure that it changes for stock dividends. I think not.
The fact here is that total investor wealth on a security does not change when there has been dividends. So accounts move, but the total value will not.
The earnings or profit left after you get after deduction of all expenses and tax, what is left is the earnings. Then u distribute dividends to preference shareholders and the then what is left is distributed to common shareholders.
If after distributing the dividends, you still have profits left, i.e. retained earnings.
That is why, if u ave reatined earnings, and stock dividends are distributed it will be deducted from the retained earnings and hence, it reduces.
Hope i was able to explain clearly…