Treasury stock refers to shares that a company has repurchased from the open market and holds in its own treasury instead of being available for trading by investors. These shares are no longer considered outstanding, which means they do not receive dividends and do not have voting rights.
Companies buy back their shares for several reasons, such as:
✔ Reducing the number of outstanding shares, which can increase earnings per share (EPS)
✔ Supporting the stock price, preventing it from falling too low
✔ Using the shares for employee stock compensation plans
✔ Changing the capital structure, by reducing equity and increasing financial leverage
When a company repurchases shares, it records them as treasury stock, which is a contra-equity account (it reduces total shareholders' equity). There are two common methods for accounting for treasury stock:
📌 Cost Method (most commonly used)
📌 Par Value Method
A company repurchases 1,000 shares at $10 per share, spending $10,000. Under the cost method, the entry would be:
📍 Journal Entry for Treasury Stock Purchase:
Treasury Stock $10,000
Cash $10,000
This reduces cash and records the repurchased shares in the treasury stock account, reducing total equity.
If the company reissues the shares at a higher price, the excess goes into an additional paid-in capital (APIC) account.
📌 Example: Reissuing Treasury Stock at $12 per Share
If the company sells 500 shares at $12 per share, the entry would be:
Cash $6,000 (500 x $12)
Treasury Stock $5,000 (500 x $10 original cost)
APIC-Treasury $1,000 (difference)
If the shares are reissued at a lower price than the repurchase cost, the difference is deducted from retained earnings if APIC is insufficient.
📌 Balance Sheet:
✔ Treasury stock is reported as a negative amount in the shareholders' equity section, reducing total equity.
✔ Assets (cash) decrease when the shares are repurchased.
📌 Income Statement:
✔ Treasury stock transactions do not impact net income, as they are equity transactions.
📌 Earnings Per Share (EPS):
✔ Since treasury stock reduces the number of outstanding shares, it increases EPS, making the company look more profitable on a per-share basis.
✔ Treasury stock represents repurchased shares that are not included in outstanding shares.
✔ It reduces total equity but does not affect net income directly.
✔ Selling treasury stock at a price higher or lower than its repurchase cost affects APIC or retained earnings.
✔ Stock buybacks can influence EPS, investor perception, and stock price movements.
Treasury stock is a crucial tool for corporate financial management, allowing companies to control their capital structure, reward shareholders, and stabilize stock prices when needed.