Treasury Stock (Treasury Shares)

What Is Treasury Stock (Treasury Shares)?

Treasury stock, otherwise called treasury shares or reacquired stock, alludes to beforehand outstanding stock that is bought back from stockholders by the issuing company. The outcome is that the total number of outstanding shares on the open market diminishes. These shares are issued however done outstanding and are not included in the distribution of dividends or the calculation of earnings per share (EPS).

Understanding Treasury Stock (Treasury Shares)

Treasury stock is a contra equity account recorded in the shareholders' equity section of the balance sheet. Since treasury stock addresses the number of shares repurchased from the open market, it reduces shareholders' equity by the amount paid for the stock.

Notwithstanding not issuing dividends and not being included in EPS calculations, treasury shares additionally have no voting rights. The amount of treasury stock repurchased by a company might be limited by its country's regulatory body. In the United States, the Securities and Exchange Commission (SEC) administers buybacks.

Treasury stock can be retired or held for resale in the open market. Retired shares are permanently canceled and can't be reissued later. When retired, the shares are not generally listed as treasury stock on a company's financial statements. Non-retired treasury shares can be reissued through stock dividends, employee compensation, or capital raising.

Recording Treasury Stock (Treasury Shares)

At the point when a company initially issues stock, the equity section of the balance sheet is increased through a credit to the common stock and the additional paid-in capital (APIC) accounts. The common stock account mirrors the par value of the shares, while the APIC account shows the excess value received over the par value. Due to [double-entry bookkeeping](/twofold entry), the offset of this journal entry is a debit to increase cash (or other asset) in the amount of the consideration received by the shareholders.

Treasury shares reduce total shareholders' equity and are generally named as "treasury stock" or "equity reduction." There are two methods of accounting for treasury stock: the cost method and the par value method. The cost method utilizes the value paid by the company during the repurchase of the shares and disregards their par value; under this method, the cost of the treasury stock is included within the stockholders' equity portion of the balance sheet. It is common for stocks to have a minimal par value, for example, $1, yet sell and be repurchased for substantially more.

Under the cash method, at the hour of the share repurchase, the treasury stock account is debited to diminish total shareholders' equity. The cash account is credited to record the expenditure of company cash. In the event that the treasury stock is later resold, the cash account is increased through a debit and the treasury stock account is diminished, increasing total shareholders' equity, through a credit. Likewise, a treasury paid-in capital account is either debited or credited depending on whether the stock was resold at a loss or a gain.

Under the par value method, at the hour of share repurchase, the treasury stock account is debited, to diminish total shareholders' equity, in the amount of the par value of the shares being repurchased. The common stock APIC account is additionally debited to diminish it by the amount originally paid in excess of par value by the shareholders. The cash account is credited in the total amount paid out by the company for the share repurchase. The net amount is included as either a debit or credit to the treasury APIC account, depending on whether the company paid more while repurchasing the stock than the shareholders did originally.

Illustration of Treasury Stock

ABC Company had originally sold 5,000 shares of common stock, with a $1 par value, for $41 per share. It thusly had $5,000 common stock (5,000 shares x $1 par value) and $200,000 common stock APIC (5,000 shares x ($41 - $1 paid in excess of par)) on its balance sheet. ABC Company has excess cash and accepts its stock is trading below its intrinsic value. Therefore, it chooses to repurchase 1,000 shares of its stock at $50 for a total value of $50,000.

The repurchase makes a treasury stock contra equity account. Under the cash method, the treasury account would be debited for $50,000 and cash credited for $50,000. Under the par value method, treasury stock would be debited for $1,000 (1,000 shares x $1 par value), common stock APIC would be debited for $49,000 (1,000 shares x ($50 repurchase price - $1 par value)), and cash would be credited for $50,000.

In both the cash method and the par value method, the total shareholders' equity is diminished by $50,000. Assume the total sum of ABC Company's equity accounts including common stock, APIC, and retained earnings was $500,000 prior to the share buyback. The repurchase brings the total shareholders' equity down to $450,000.

Features

• Treasury stock reduces total shareholders' equity on a company's balance sheet, and it is hence a contra equity account.
• Treasury stock is formerly outstanding stock that has been repurchased and is being held by the issuing company.
• The cost method and the par value method are the two methods of recording treasury stock.

FAQ

What Are Retired Shares?

Retired shares are treasury shares that have been repurchased by the issuer out of the company's retained earnings and permanently canceled. While other treasury shares can be reissued or sold on the open market, retired shares can't be reissued, they have no market value and they never again address a share of ownership in the issuing corporation. Retired shares won't be listed as treasury stock on a company's financial statements.

What Is the Cost Method of Accounting for Treasury Stock?

The cost method of accounting values treasury stock according to the price the company paid to repurchase the shares, rather than the par value. Using this method, the cost of the treasury stock is listed in the stockholders' equity portion of the balance sheet.

What Is the Par Value Method of Accounting for Treasury Stock?

The par value method is an alternative method for valuing the stock acquired in a buyback. Under this method, shares are valued according to their par value at the hour of repurchase. This sum is debited from the treasury stock account, to diminish total shareholders' equity. The common stock APIC account is additionally debited by the amount originally paid in excess of par value by the shareholders. The cash account is credited by the total cost of the share repurchase. The net amount is recorded as either a debit or a credit, depending on whether the company paid pretty much than the shareholders did originally.