The usual accounting for a stock dividend is to decrease retained earnings and increase the paid-in capital accounts by a corresponding amount, the amount transferred depending on the size of the dividend.  It is common practice in the United States for stock dividends of less than 20% to 25% (i.e., small stock dividends) to be recorded at current market value, while those of greater than 20% to 25% to be recorded at par or stated value.  For stocks without par or stated value, the amount is established by law or the board of directors.  For stock dividends, most US states permit companies to decrease retained earnings or any paid-in capital account other than those representing legal capital.

Stock dividends have no effect on the individual shareholder’s percentage of ownership in the firm.  If, for example, a shareholder owns 10,000 shares in a company having 1,000,000 shares outstanding, that shareholder owns 1% of the outstanding shares; after a 10% stock dividend, the shareholder will still own 1% of the outstanding shares: 11,000 of 1,100,000 shares outstanding.

% Ownership Interest before Stock Dividend = % Ownership Interest after Stock Dividend.

Stock dividends create neither a liability nor have an effect on cash.  When a stock dividend is made, retained earnings are debited while the capital-stock and paid-in surplus accounts credited.  From an accounting point of view, its only effect is a transfer of value from retained earnings to the paid-in capital accounts, it having no impact on the total amount of equity.

Stock Dividends and the Capitalization of Earnings (Example)
A company has 10,000 shares of par $1 common stock issued and outstanding.  It declares a 10% (“small”) stock dividend on 1 July 2018.  The current market price of €50 is used for valuation.
1 Jul 18 Retained Earnings 50,000
Capital Stock 1,000
Paid-In Surplus 49,000
To record the declaration of a cash dividend on 1 Jul 2018

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