Stock Dividends and the Entity Theory.

Abstract The purpose of this paper is to examine the nature of the ordinary stock dividend, common shares issued to common stockholders, and to relate the accounting treatment of this type of transaction to the entity theory of corporate accounting. Whether or not entity theory, proprietary theory, fund theory or some combination of theories provides the most useful and meaningful frame of reference for accounting practice, which is a fundamental issue that deserves discussion. Such a discussion is beyond the boundaries of this paper. The issue is circumvented by the assumption that the entity theory is the most useful frame of reference for the following analysis. In support of this approach, current accounting practice may be cited. Today the entity concept is generally used in accounting for corporate transactions. Thus, the underlying concept is that the corporation is an entity separate from any of the parties at interest. Therefore the accounting processes revolve about the corporation and not the stockholders or creditors.