Accounting for Capital Stock

When the shares are issued, that can be explained as an issuance of shares at their fair value or a stock split or the combination of both. Stock dividends can be considered as a combination of capitalization of retained earnings and stock split (stock split theory). But, it can also be explained by using fictitious transaction such as payment of cash dividend and subsequent issuance of shares at their fair value (dividend theory). In Japan, at present, the legal structure is established using the former explanation. But it is also possible to establish a legal structure based on the latter explanation. Both explanations or rules have defects. Under the stock split theory, it is hard to explain why the retained earnings change their character to paid in capital, and it is hard to explain when the different class of the shares are issued as a stock split. As for the dividend theory, the defect is that it uses fictitious transaction which actually do not take place. This paper describes the accounting treatment based on each theory and extends the use of them to the transaction in its own shares in general.