presentation of treasury shares in balance sheet

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What Is Treasury Stock?

• Understanding It
• Recording Treasury Stock

Purpose of Treasury Stock

The bottom line.

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Treasury Stock (Treasury Shares): Definition, Use on Balance Sheets, and Example

Investopedia / Laura Porter

Treasury stock refers to previously outstanding stock that was bought back from stockholders by the issuing company. The result is that the total number of outstanding shares on the open market decreases. Treasury stock remains issued but is not included in the distribution of dividends or the calculation of earnings per share (EPS) . Treasury stock is also referred to as treasury shares or reacquired stock.

Key Takeaways

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

Understanding Treasury Stock

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

In addition to not issuing dividends and not being included in EPS calculations, treasury shares also have no voting rights. The amount of treasury stock repurchased by a company may be limited by its nation's regulatory body. In the United States, the Securities and Exchange Commission (SEC) governs buybacks.

Treasury stock can be retired or held for resale in the open market . Retired shares are permanently canceled and cannot be reissued later. Once retired, the shares are no longer 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.

Companies can reacquire shares in different ways. The most common methods to buy back their shares include a tender offer or through a direct repurchase. A tender offer involves buying shares back from investors above the market price or at a premium. Companies that do direct repurchases buy shares on the secondary market, just like regular investors do.

How Treasury Stock Is Recorded

When a company initially issues stock, the equity section of the balance sheet increases through a credit to the common stock and the additional paid-in capital (APIC) accounts. The common stock account reflects the par value of the shares, while the APIC account shows the excess value received over the par value.

Due to double-entry bookkeeping , 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 labeled as treasury stock or equity reduction. There are two methods of accounting for treasury stock: the cost method and the par value method.

Cost Method

The cost method is the most commonly used method by most public entities. It uses the value paid by the company during the repurchase of the shares and ignores their par value. The cost of the treasury stock is included within the stockholders' equity portion of the balance sheet under this method. It is common for stocks to have a minimal par value, such as $1, but sell and be repurchased for much more.

When shares are repurchased, the treasury stock account is debited to decrease total shareholders' equity . The cash account is credited to record the expenditure of company cash. If the treasury stock is resold later, the cash account is increased through a debit while the treasury stock account is decreased. This increases total shareholders' equity through a credit notation on the balance sheet .

A treasury paid-in capital account is also either debited or credited depending on whether the stock was resold at a loss or a gain.

Par Value Method

Under the par value method, the treasury stock account is debited to decrease total shareholders' equity at the time of share repurchase. This is done in the amount of the par value of the shares being repurchased.

The common stock APIC account is also debited to decrease it by the amount originally paid over the 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 a credit to the treasury APIC account, depending on whether the company paid more when repurchasing the stock than the shareholders did originally.

$795 billion

Corporations use buybacks to reduce the amount of shares in circulation, thereby boosting their stock price. In 2023, the top 500 companies spent nearly $800 billion to repurchase their own shares.

Why do companies choose to purchase stock from investors? There are a few reasons why companies buy and hold treasury stock, including:

• To resell them. This allows companies to raise capital at a later date. Any money raised through the resale of treasury stock allows corporations to grow and make investments for the future.
• To increase shareholder interest. When shares are repurchased, it decreases the number of outstanding shares. As such, shareholder value and interest increases. An increase in shareholder interest can help keep hostile acquirers away.
• To retire shares . Existing shareholders see a boost in their ownership stake when treasury shares are retired and taken out of circulation.

Example of Treasury Stock

Here's a hypothetical example to show how treasury stock works. Let's say that ABC Company originally sold 5,000 shares of common stock, with a $1 par value, at $41 per share. On its balance sheet, the company had:

• $5,000 common stock (5,000 shares x $1 par value)
• $200,000 common stock APIC (5,000 shares x ($41 – $1 paid over par))

ABC Company has excess cash and believes its stock trades below its intrinsic value. As a result, it decides to repurchase 1,000 shares of its stock at $50 for a total value of $50,000. The repurchase creates 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.

The total shareholders' equity is decreased by $50,000 in both methods. Assume the total sum of ABC Company's equity accounts including common stock, APIC, and retained earnings was $500,000 before the share buyback . The repurchase brings the total shareholders' equity down to $450,000.

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 cannot be reissued, they have no market value and they no longer represent a share of ownership in the issuing corporation. Retired shares will not 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, as opposed to 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 way to value the stock acquired in a buyback. Under this method, shares are valued according to their par value at the time of repurchase. This sum is debited from the treasury stock account, to decrease total shareholders' equity. The common stock APIC account is also 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 more or less than the shareholders did originally.

Treasury stock refers to shares that companies buy back, thereby decreasing the number of shares outstanding. This stock can be purchased through a tender offer to investors or via a direct repurchase. Corporations may choose to hold treasury stock to raise capital later through resale, to boost shareholder interests, or to retire them completely. If you're interested in finding a company's treasury stock, look under the shareholders' equity section of its balance sheet.

Kotler, Harry. " Treasury Stock; A Corporate Anomaly ." Cleveland State Law Review , vol. 1, no. 2, 1952, pp. 10-11.

PwC. " U.S. Financing Guide: Chapter 9: Share Repurchase and Treasury Stock: 9.3 Treasury Stock ."

U.S. Securities and Exchange Commission. " Stock Buybacks and Corporate Cashouts ."

Accounting Tools. " The Cost Method of Accounting for Investments ."

LibreTexts Libraries. " Principles of Accounting: 14.2: Analyze and Record Transactions for the Issuance and Repurchase of Stock ."

S&P Global. " S&P 500 Buybacks Increase 18% Compared to Q3 ."

PwC. " U.S. Financing Guide: Chapter 9: Share Repurchase and Treasury Stock: 9.4 Share Retirement ."

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Home > Finance > How Is Treasury Stock Shown On The Balance Sheet?

How Is Treasury Stock Shown On The Balance Sheet?

Published: December 27, 2023

Learn how treasury stock is presented on the balance sheet and its significance in finance.

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Table of Contents

Introduction, definition of treasury stock, purpose of treasury stock, accounting treatment of treasury stock, presentation of treasury stock on the balance sheet, example of how treasury stock is shown on the balance sheet, importance of disclosing treasury stock.

Treasury stock is a term commonly used in finance and accounting that refers to shares of a company’s own stock that have been repurchased by the company. This stock is usually held by the company itself rather than being retired or canceled, and it is therefore considered as “outstanding” stock but not actively traded in the market. The treatment of treasury stock on the balance sheet is an important aspect of financial reporting, as it reflects the company’s financial position and provides insights into its capital structure.

The concept of treasury stock may seem counterintuitive at first, as companies typically issue shares of stock to raise capital from investors. However, there are various reasons why a company might decide to repurchase its own stock. It could be a strategic move to return excess cash to shareholders, to increase the company’s earnings per share, or to thwart a potential hostile takeover by reducing the number of shares available for trading.

In this article, we will explore the accounting treatment of treasury stock and how it is presented on the balance sheet. We will also discuss the importance of disclosing treasury stock information to investors and other stakeholders.

Treasury stock is a term used to describe shares of a company’s own stock that has been repurchased by the company. When a company buys back its own shares, those shares are no longer considered to be outstanding in the market. Instead, they are held by the company itself, which is why they are referred to as treasury stock.

Unlike shares that are retired or canceled, treasury stock remains part of the company’s total capital stock but is not available for trading or voting purposes. It is essentially considered “inactive” stock and is typically held by the company in its own treasury account.

It’s important to note that treasury stock is different from authorized, issued, and outstanding shares. Authorized shares are the maximum number of shares that a company is allowed to issue, while issued shares are the number of shares that have been actually issued by the company. Outstanding shares, on the other hand, are the issued shares that are currently held by investors in the market.

Treasury stock can be acquired in a number of ways, including open market purchases, direct repurchases from shareholders, or through stock buyback programs. The decision to repurchase shares of its own stock is typically made by a company’s management and board of directors, based on various factors such as the company’s financial position, strategic objectives, and market conditions.

The main purpose of acquiring treasury stock is to provide the company with more flexibility in managing its capital structure and utilizing its available cash. It can also be seen as a way to enhance shareholder value by reducing the number of shares outstanding, which may increase earnings per share and potentially boost the stock price.

The repurchase of a company’s own stock, known as treasury stock, serves various purposes and can be driven by strategic, financial, and regulatory considerations. Let’s explore some of the main purposes behind companies acquiring treasury stock:

• Capital Structure Management: By repurchasing its own stock, a company can adjust its capital structure and optimize its financial position. This can be done by reducing the number of shares outstanding, which may increase earnings per share and enhance shareholder value. It can also allow the company to redistribute its excess cash to shareholders or reissue the treasury stock for other purposes, such as employee stock option plans.
• Market Manipulation and Defensive Measures: Acquiring treasury stock can be a defensive tactic to prevent hostile takeovers or counteract the influence of activist investors. By reducing the number of shares available for trading, the company can make it more difficult for external parties to gain control or influence over the company’s decision-making processes.
• Undervaluation and Investment Opportunity: Companies may repurchase their stock when they believe it is undervalued in the market. By buying back shares at a lower price, the company can potentially generate long-term value for shareholders when the stock price eventually appreciates. This can also signal to investors that the management has confidence in the company’s future prospects.
• Tax Efficiency: Repurchasing treasury stock can be a tax-efficient way for companies to distribute excess cash to shareholders. Instead of paying dividends, which may be subject to higher tax rates, the company can utilize its cash to buy back stock and increase the value of the remaining shares.
• Employee Stock Incentives: Treasury stock can be used to support employee stock incentive plans such as stock options or restricted stock units. By issuing treasury stock to employees, the company can align their interests with those of the shareholders and provide them with a sense of ownership and participation in the company’s success.

It’s important to note that while treasury stock can have various benefits, there are also potential drawbacks and risks. Companies need to carefully evaluate their financial resources, market conditions, and regulatory requirements before engaging in treasury stock transactions to ensure they are acting in the best interests of their shareholders and maintaining transparency in their financial reporting.

The accounting treatment of treasury stock involves recording the repurchase of shares on the company’s balance sheet and making appropriate adjustments to the equity section of the financial statements. Here are the key aspects of the accounting treatment of treasury stock:

• Cost Method: The most commonly used method for accounting for treasury stock is the cost method. Under this method, the treasury stock is recorded at its acquisition cost, which is the price paid to repurchase the shares. The cost of the treasury stock is debited to the treasury stock account, a contra-equity account that reduces the shareholders’ equity on the balance sheet.
• Reduction in Shareholders’ Equity: The repurchase of treasury stock reduces the total shareholders’ equity of the company. This reduction is reflected on the balance sheet as a deduction from the company’s total common stock and additional paid-in capital. Treasury stock is reported as a negative amount in the equity section of the balance sheet to indicate that it is a reduction in shareholders’ equity.
• Treatment of Dividends and Voting Rights: Treasury stock does not have voting rights and is not entitled to receive dividends or participate in shareholder meetings. Therefore, companies do not include treasury stock when determining the total number of shares for voting or dividend calculations.
• Disclosure in Financial Statements: The accounting treatment of treasury stock requires clear disclosure in the company’s financial statements. This includes providing information on the number of shares repurchased, the cost of the treasury stock, and any changes in the treasury stock account. These details are typically disclosed in the notes to the financial statements to ensure transparency for investors and other stakeholders.

It’s important for companies to adhere to Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS) when accounting for treasury stock. Following the proper accounting treatment ensures accurate financial reporting and helps investors make informed decisions about the company’s financial health and performance.

It’s worth noting that the accounting treatment of treasury stock can vary depending on local regulatory requirements and specific company circumstances. Companies should consult with their accountants or financial advisors to ensure compliance with applicable accounting standards and regulations.

When it comes to presenting treasury stock on the balance sheet, it is important for companies to follow specific guidelines to accurately reflect their financial position. Here’s how treasury stock is typically presented on the balance sheet:

• Shareholders’ Equity Section: Treasury stock is reported as a negative amount within the shareholders’ equity section of the balance sheet. It is deducted from the common stock and additional paid-in capital accounts. This deduction reflects the reduction in shareholders’ equity due to the repurchase of shares.
• Separate Line Item: Treasury stock is commonly presented as a separate line item within the shareholders’ equity section. It is labeled as “Treasury Stock” or “Stock Repurchased” to clearly indicate that it represents shares that the company has bought back from the market.
• Carrying Value: The carrying value of treasury stock is typically stated as the cost of the shares repurchased. This is the amount at which the shares were originally bought back from the market or shareholders and is recorded as a negative number beneath the “Treasury Stock” line item.
• Net Equity Impact: The presentation of treasury stock on the balance sheet has a net impact on shareholders’ equity. The deduction of treasury stock from the common stock and additional paid-in capital accounts reduces the overall equity value, reflecting the decrease in outstanding shares due to the repurchase.
• Detailed Disclosure: Companies often provide additional disclosure in the footnotes to the financial statements regarding their treasury stock activities. This includes information about the number of shares repurchased, the average cost per share, and any changes in the treasury stock account balance over the reporting period.

By presenting treasury stock as a separate line item on the balance sheet, companies provide transparency and clarity to stakeholders regarding the repurchase of shares and its impact on the shareholders’ equity. This allows investors, creditors, and analysts to assess the company’s capital structure and make informed decisions about its financial health and performance.

It’s important for companies to adhere to applicable accounting standards, such as Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), when presenting treasury stock on the balance sheet. This ensures consistency and comparability in financial reporting across different companies and industries.

To illustrate how treasury stock is presented on the balance sheet, let’s consider a hypothetical example:

Company XYZ repurchases 10,000 shares of its own common stock at a cost of $20 per share. The company’s common stock was originally issued at $30 per share, and it has additional paid-in capital of $200,000.

On the balance sheet, the presentation of treasury stock would look as follows:

• Common Stock: 1,000,000 shares x $30 = $30,000,000
• Additional Paid-in Capital: $200,000
• Treasury Stock: (10,000 shares x $20) = ($200,000)

In this example, the common stock and additional paid-in capital represent the initial equity raised by the company through the issuance of shares. The treasury stock is presented as a separate line item, indicating the shares repurchased by the company.

The value of the treasury stock is calculated by multiplying the number of repurchased shares (10,000) by the cost per share ($20), resulting in a negative value of ($200,000). This deduction from the shareholders’ equity section reflects the reduction in the overall equity due to the repurchase of shares.

It’s worth noting that the presentation of treasury stock on the balance sheet may vary depending on the specific accounting standards followed and the reporting requirements of the jurisdiction in question. However, the overall concept remains consistent: treasury stock is shown as a separate line item within the shareholders’ equity section, with a negative value representing the cost of the repurchased shares.

By clearly presenting treasury stock on the balance sheet, companies provide transparency to stakeholders regarding their capital structure and the impact of stock repurchases on shareholders’ equity. This information enables investors, creditors, and analysts to better assess the financial health and performance of the company.

Disclosing treasury stock information is of significant importance as it provides transparency and insights into a company’s capital structure and stock repurchase activities. Here are some reasons why disclosing treasury stock is essential:

• Accuracy of Financial Statements: In keeping with accounting principles and regulations, disclosing treasury stock ensures the accuracy and completeness of a company’s financial statements. By including treasury stock as a separate line item, stakeholders can clearly see the reduction in shareholders’ equity resulting from stock repurchases, allowing for more accurate analysis of the company’s financial health.
• Investor Decision-Making: Investors rely on accurate and comprehensive information to make informed investment decisions. When a company discloses treasury stock, it provides investors with a clear picture of the company’s capital structure and any potential impact on key financial metrics, such as earnings per share (EPS). This information helps investors assess the company’s performance and evaluate its long-term growth prospects.
• Protection of Shareholders’ Interests: Disclosing treasury stock is crucial for protecting the interests of shareholders. When a company repurchases its own stock, it may affect ownership rights, voting power, and entitlement to dividends. Transparent disclosure ensures that shareholders are aware of the company’s actions and can assess the potential impact of stock repurchases on their investment.
• Corporate Governance and Accountability: By disclosing treasury stock, a company demonstrates its commitment to transparency and accountability. This fosters trust among stakeholders, including shareholders, employees, lenders, and regulatory authorities. It also indicates the company’s adherence to sound corporate governance practices, which are highly valued in today’s business environment.
• Use in Financial Analysis: Disclosed treasury stock information can be utilized for financial analysis purposes. Analysts can examine the trends of stock repurchases over time and assess their impact on various financial ratios and metrics, such as return on equity (ROE) and price-earnings (P/E) ratio. This analysis helps in evaluating the efficiency and effectiveness of a company’s share repurchase strategy.

It is worth noting that the disclosure of treasury stock may be required by accounting standards, such as Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). Companies should comply with these standards and provide comprehensive and accurate disclosure in their financial statements and related footnotes.

Overall, the disclosure of treasury stock is crucial for maintaining transparency, protecting shareholder interests, and facilitating informed decision-making by investors and other stakeholders. By providing clear and complete information, companies demonstrate their commitment to sound financial reporting practices and foster trust among the investing community.

Treasury stock plays a significant role in a company’s financial reporting and capital structure. Understanding the definition, purpose, accounting treatment, and presentation of treasury stock is essential for investors, analysts, and other stakeholders. By accurately disclosing treasury stock information, companies can provide transparency and insights into their stock repurchases, enabling stakeholders to make informed decisions.

Treasury stock is a term used to describe shares of a company’s own stock that have been repurchased by the company and are held by the company itself. The repurchase of treasury stock can serve various purposes, such as capital structure management, market manipulation, undervaluation opportunities, tax efficiency, and support for employee stock incentives.

In terms of accounting treatment, treasury stock is typically recorded at cost and deducted from the shareholders’ equity section of the balance sheet. It is presented as a separate line item, indicating the repurchased shares and their negative value. Disclosing treasury stock information ensures accurate financial reporting, helps investors assess the financial health of the company, and protects shareholders’ interests.

Disclosing treasury stock is important for the accuracy of financial statements, investor decision-making, protection of shareholders’ interests, corporate governance, and financial analysis. By providing transparency and comprehensive disclosure, companies demonstrate their commitment to accountability and promote trust among stakeholders.

In conclusion, treasury stock is a key aspect of a company’s financial landscape and understanding its treatment and presentation on the balance sheet is crucial for financial analysis and investor confidence. Companies should adhere to accounting standards, disclose treasury stock information accurately, and ensure transparency in their reporting practices to maintain credibility and facilitate informed decision-making.

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Treasury Stock on the Balance Sheet

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When you are thinking about buying stocks in a company, you will want to look at its balance sheet. When you are looking over a balance sheet , you will run across an entry under the shareholders' equity section called treasury stock. The dollar amount of treasury stock shown on the balance sheet refers to the cost of the shares a firm has issued and then taken back at a later time, either through a share repurchase program or other means.

These shares may be re-issued in the future, unlike retired shares that no longer have value. If shares no longer have value, a company removes them from its balance sheet.

Key Takeaways

• Treasury stock is the cost of shares a company has bought back.
• When a firm buys back stock, it may resell them later to raise cash, use them in an acquisition, or retire the shares.
• Opinions differ on whether treasury stock should be carried on the balance sheet at historical cost or at the current market value.

What Happens to Buyback Stock

Companies buy back their stock to boost their share price, among other reasons. When the firm buys back its shares, there are a few things that can be done with them. One choice is to sit on those buyback shares and later resell them to the public to raise cash. They can also be used in the purchase of other firms.

The company could also retire those shares and reduce the active share count for good. This would cause each active share to represent a greater ownership stake in the firm for investors. This means they would get a bigger cut of the dividends and profits as tallied by basic and diluted EPS .

The Good and Bad of Share Buybacks

Neither course of action shown above is better than the other. For the most part, either route can be good if the allocation of stock is managed well.

A real-world example of wise share buybacks is that of Teledyne Technologies. The founder and CEO, Henry Singleton, used treasury stock very well during his tenure. He increased the true value of the stock for long-term owners who stuck with the firm. Singleton bought back stock when the shares of the company were low cost. He also issued it liberally when he felt the stock was overvalued. These actions brought in cash to spend on useful assets and projects.

Treasury stock buyback schemes can sometimes destroy value. This might happen if a firm pays too much for its own shares or issues shares to pay for acquisitions when those shares are undervalued.

Though not entirely related to treasury stock, one of the most famous ill-timed examples to come out of corporate America in recent years was a 2010 deal in which the former Kraft Foods, spun out of Philip Morris, acquired Cadbury PLC. Kraft sold undervalued stock to pay for its overvalued $19.6 billion acquisition.

Real-World Examples

One of the largest examples you'll ever see of treasury stock on a balance sheet is Exxon Mobil Corp., one of the few major oil firms and the main offspring of John D. Rockefeller's Standard Oil empire.

At the end of 2018, Exxon had a stunning $225.553 billion in treasury stock on the books that it had bought back but not canceled.

Exxon Mobil has a policy of giving back surplus cash flow to owners through a mixture of dividends and share buybacks and keeping the stock with plans to use it again. Every decade or two, it buys a major energy firm. Exxon pays for the deal with stock. It dilutes stockholders' ownership percentages by reselling those shares, then using cash flow to buy that stock back, undoing the dilution.

It's a win-win for all parties involved. The owners of the acquisition target those who want to stay invested and don't have to pay capital gains tax from the merger. The owners of Exxon Mobil end up with the economic equivalent of an all-cash deal, and their ownership percentage gets restored. Exxon uses the cash flow from its older and newly gained earnings streams to rebuild its treasury stock position.

The Future of Treasury Stock

From time to time, certain talks take place in the finance industry as to whether or not it would be a good idea to change the rules for how firms carry treasury stock on the balance sheet. At present, treasury stock is carried at historical cost.

Some think it should reflect the current market value of the firm's shares. At least, in theory, the firm could sell the shares on the open market for that price or use them to buy other firms, converting them back into cash or useful assets. This thinking has yet to prevail.

Some states limit the amount of treasury stock a firm can carry as a cut in shareholders' equity at any given time. Limits are placed because it is a way of taking assets out of the business by the people who own shares, which in turn may threaten the legal rights of creditors. At the same time, some states don't allow firms to carry treasury stock on the balance sheet at all. Instead, they must retire shares. California, for instance, does not support treasury stocks, though some firms in the state do have them.

AccountingforManagement.org. " Treasury Stock - Cost Method ."

Corporate Finance Institute. " Share Repurchase ."

GuruFocus. " Henry Singleton: A Man Even Buffett Envied ."

SEC. " Offer by Kraft Foods Inc. for Cadbury PLC ."

Exxon Mobil. " Our History ."

Exxon Mobil. " 2018 Summary Annual Report ." Page 38.

SEC. " Form S4 Registration Statement ."

The National Law Review. " Four Decades After Being Demolished, Some California Corporations Continue to Refer to 'Treasury Stock .'"

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Treasury Stock

Step-by-Step Guide to Understanding Treasury Stock

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What is Treasury Stock?

Treasury Stock represents shares that were issued and traded in the open markets but are later reacquired by the company to decrease the number of shares in public circulation.

Table of Contents

Treasury Stock Balance Sheet Accounting

Share buyback rationale and impact on share price, treasury stock contra-equity journal entry, treasury stock in diluted share count calculation, retired vs. non-retired treasury stock, treasury stock cost method vs. par value method.

On the shareholders’ equity section of the balance sheet , the “Treasury Stock” line item refers to shares that were issued in the past but were later repurchased by the company in a share buyback.

Following the repurchase, the formerly outstanding shares are no longer available to be traded in the markets and the number of shares outstanding decreases – i.e. the reduced number of shares publicly traded is referred to as a decline in the “float”.

Since the shares are no longer outstanding, there are three notable impacts:

• The repurchased shares are NOT included in the calculation of basic or diluted earnings per share (EPS).
• The repurchased shares are NOT included in the distribution of dividends to equity shareholders.
• The repurchased shares do NOT retain the voting rights previously given to the shareholder.

Therefore, an increase in treasury stock via a share buyback program or a one-time buyback can cause the share price of a company to “artificially” increase.

The value attributable to each share has increased on paper, but the root cause is the decreased number of total shares, as opposed to “real” value creation for shareholders.

The rationale for share repurchases is often that management has determined its share price is currently undervalued. Share repurchases – at least in theory – should also occur when management believes its company’s shares are underpriced by the market.

If the company’s share price has fallen in recent periods and management proceeds with a buyback, doing so can send out a positive signal to the market that the shares are potentially undervalued.

In effect, the company’s excess cash sitting on its balance sheet is utilized to return some capital to equity shareholders, rather than issuing a dividend .

If the shares are priced correctly, the repurchase should not have a material impact on the share price – the actual share price impact comes down to how the market perceives the repurchase itself.

Controlling-Stake Retention

One common reason behind a share repurchase is for existing shareholders to retain greater control of the company.

By increasing the value of the shareholders’ interest in the company (and voting rights), the repurchase of shares helps fend off hostile takeover attempts.

If the equity ownership of a company is more concentrated, takeover attempts become far more challenging (i.e. certain shareholders hold more voting power), so share buybacks can also be utilized as a defensive tactic by management and existing investors.

Why is Treasury Stock Negative?

Treasury stock is considered a contra-equity account.

Contra-equity accounts have a debit balance and reduce the total amount of equity owned – i.e. an increase in treasury stock causes the shareholders’ equity value to decline.

That said, treasury stock is shown as a negative value on the balance sheet and additional repurchases cause the figure to decrease further.

On the cash flow statement , the share repurchase is reflected as a cash outflow (“use” of cash).

After a repurchase, the journal entries are a debit to treasury stock and credit to the cash account.

If the company were to resell the previously retired shares at a higher price than the original price (i.e. when retired), the cash would be debited by the sale amount, treasury stock would be credited by the original amount (i.e. same as prior), but the additional paid in capital ( APIC ) account would be credited to ensure both sides balance.

If the board elects to retire the shares, the common stock and APIC would be debited, while the treasury stock account would be credited.

To calculate the fully diluted number of shares outstanding,  the standard approach is the treasury stock method (TSM) .

Examples of Potentially Dilutive Securities

• Employee Stock Options
• Restricted Stock Units (RSUs)

Under the TSM , the options currently “in-the-money” (i.e. profitable to exercise as the strike price is greater than the current share price) are assumed to be exercised by the holders.

However, the more prevalent treatment in practice has been for all outstanding options – regardless of if they are in or out of the money – to be included in the calculation.

The intuition is that all outstanding options, despite being unvested on the present date, will eventually be in the money, so as a conservative measure, they should all be included in the diluted share count.

The final assumption of the TSM approach is that the proceeds from the exercise of the dilutive securities will immediately be used to repurchase shares at the current share price – under the presumption that the company is incentivized to minimize the net impact of dilution.

Treasury stock can either be in the form of:

• Retired Treasury Stock (or)
• Non-Retired Treasury Stock

Retired treasury stock – as implied by the name – is permanently retired and cannot be re-instated on a later date.

In comparison, non-retired treasury stock is held by the company for the time being, with the optionality to be re-issued at a later date if deemed appropriate.

For example, non-retired shares can be re-issued and ultimately return to being traded in the open markets by:

• Dividends to Equity Shareholders
• Shares Issued Per Options Agreements (and Related Securities – e.g. Convertible Debt)
• Stock-Based Compensation for Employees
• Capital Raising – i.e. Secondary Offerings, New Financing Round

In general, there are two methods of accounting for treasury stock:

• Cost Method
• Par Value Method

Under the cost method, the more common approach, the repurchase of shares is recorded by debiting the treasury stock account by the cost of purchase.

Here, the cost method neglects the par value of the shares, as well as the amount received from investors when the shares were originally issued.

By contrast, under the par value method, share buybacks are recorded by debiting the treasury stock account by the shares’ total par value.

The cash account is credited for the amount paid to purchase the treasury stock.

In addition, the applicable additional paid-in capital (APIC) or the reverse (i.e. discount on capital) must be offset by a credit or debit.

• If the credit side is less than the debit side, APIC is credited to close the difference
• If the credit side is greater than the debit side, APIC is debited instead.

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How Treasury Stock Influences the Balance Sheet

Explore the impact of treasury stock on a company's financial health and shareholder equity, including its effect on key financial ratios.

Treasury stock represents a company’s own shares that have been reacquired. It is a significant element in corporate finance, influencing the balance sheet and overall financial health of an entity.

Understanding how treasury stock impacts a company’s financial statements is crucial for investors, analysts, and other stakeholders. These repurchased shares can affect shareholder equity and various financial ratios, which in turn play a role in investment decisions and market perceptions.

Treasury Stock: Definition and Balance Sheet Presentation

Treasury stock consists of shares that were once part of the float and outstanding shares but were subsequently repurchased by the issuing company. These shares are held in the company’s treasury and are not considered when calculating earnings per share or dividends. On the balance sheet, treasury stock is listed under shareholders’ equity as a contra equity account. This means it has a debit balance, unlike the typical credit balance of other equity accounts.

The method of accounting for treasury stock is either the cost method or the par value method. Under the cost method, the repurchased shares are recorded at the price paid to acquire them. The par value method, less common, involves recording the shares at their par value, with the excess of the purchase price over par value deducted from additional paid-in capital or retained earnings.

When a company buys back its shares, the total shareholders’ equity is reduced because treasury stock is subtracted from the total equity. This transaction decreases the number of shares outstanding, which can lead to a higher earnings per share since the same amount of earnings is spread over a smaller number of shares.

Effects of Treasury Stock on Financial Ratios

Treasury stock transactions can influence a company’s financial health as reflected in its ratios, which are used by stakeholders to assess performance and stability. For instance, the return on equity (ROE) ratio, which measures a company’s profitability in generating profits from its equity, is affected by treasury stock purchases. When a company acquires its own shares, the denominator in the ROE calculation, which is average shareholders’ equity, decreases. Assuming net income remains constant, this leads to an increase in the ROE ratio, potentially signaling more efficient equity use to stakeholders.

Liquidity ratios, such as the current ratio and quick ratio, may also be impacted by treasury stock transactions. These ratios measure a company’s ability to meet short-term obligations with its most liquid assets. The repurchase of shares using cash reduces the company’s cash reserves, which can result in a lower liquidity ratio. This indicates a reduced buffer for the company to cover immediate liabilities, which could be a concern for creditors and investors alike.

The debt-to-equity ratio, which compares a company’s total liabilities to its shareholders’ equity, can be influenced by the repurchase of shares as well. As treasury stock reduces total shareholders’ equity, this ratio may increase, suggesting that the company is financing more of its operations through debt. A higher debt-to-equity ratio can be interpreted as a company taking on more risk, which might affect the cost of borrowing and the perception of the company’s financial stability.

Disclosure Requirements for Treasury Stock

Financial reporting standards mandate that companies provide specific disclosures regarding treasury stock to ensure transparency and allow stakeholders to fully understand the impact of these transactions on the financial statements. The disclosures typically include the number of shares repurchased, the average cost paid, and the total amount spent on buybacks. This information is often found in the notes to the financial statements, which accompany the balance sheet, income statement, and statement of cash flows.

Additionally, companies must disclose the method used for accounting for treasury stock, whether it is the cost method or the par value method, as this affects how the transactions are reflected in the financial statements. The rationale behind share repurchase decisions, such as excess cash or a strategy to increase earnings per share, is also commonly provided in the management’s discussion and analysis (MD&A) section of annual reports. This narrative gives context to the numbers and can influence investor sentiment and decision-making.

The impact of treasury stock transactions on the company’s share repurchase program, if one exists, is another disclosure requirement. Details such as the remaining authorized amount for future repurchases and any changes to the program provide investors with insights into the company’s future capital allocation strategies. This information can be crucial for forecasting and valuing the company’s stock.

Treasury Stock Transactions and Shareholder Equity

The interplay between treasury stock transactions and shareholder equity is a nuanced aspect of corporate finance. When a company repurchases its shares, the action is reflected as a reduction in the total equity on the balance sheet because treasury stock is a contra equity account. This reduction directly affects the retained earnings component, which is the cumulative amount of profit that has been reinvested in the business rather than distributed to shareholders as dividends. The repurchase of shares, therefore, signals a redirection of funds that could have been available for dividends or reinvestment in company operations.

The alteration in shareholder equity composition also has implications for the book value per share, a metric that represents the net asset value of a company divided by the number of outstanding shares. As treasury stock transactions decrease the number of outstanding shares without changing the net assets, the book value per share increases. This can make the company appear more attractive to investors who use this metric as a gauge for stock valuation.

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Where is treasury stock reported on the balance sheet?

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Under the cost method of recording treasury stock, the cost of treasury stock is reported at the end of the Stockholders’ Equity section of the balance sheet . Treasury stock will be a deduction from the amounts in Stockholders’ Equity.

Treasury stock is the result of a corporation repurchasing its own stock and holding those shares instead of retiring them.

In the general ledger there will be an account Treasury Stock with a debit balance. (At the time of the purchase of treasury stock, the corporation will debit the account Treasury Stock and will credit the account Cash .)

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Understanding Treasury Stock on the Balance Sheet

Treasury stock is a term used to describe a company’s own shares that have been repurchased and are held by the company.

It is important to understand where treasury stock appears on a balance sheet and how it impacts the financial statements of a business. Let’s discuss treasury stock and what it means for your business.

What Is Treasury Stock?

Treasury stock refers to shares of a corporation that were issued but then bought back by the corporation itself.

These are not outstanding shares and will not appear among the total number of shares owned by outside shareholders, however, they do have an impact on the balance sheet of a business.

The goal for companies when purchasing their own stocks is usually to reduce their share count, which can result in an increase in earnings per share (EPS) if all other factors remain constant. Companies may also reissue their treasury stocks if they believe it will be beneficial for them at a later date.

Where Does Treasury Stock Appear on the Balance Sheet?

On the balance sheet, treasury stock will usually appear under either “share capital” or “additional paid-in capital” as a negative value or liability.

This negative value indicates that there is less equity available than before due to the repurchase of shares and should be taken into account when looking at other parts of the balance sheet, such as total assets and liabilities.

The amount of treasury stock also affects EPS because it decreases the number of outstanding shares used in calculating this metric, which can lead to higher reported EPS values if all else remains equal.

How Does Treasury Stock Affect Financial Statements?

Treasury stock has an effect on both your income statement and balance sheet because it decreases both retained earnings and common stock balances while increasing cash levels on your balance sheet.

On your income statement, treasury stock reduces net income since you are paying out money from retained earnings in order to buy back your own stocks.

This can also decrease dividends paid out since fewer people will have access to them if there are fewer outstanding shares after purchasing treasury stocks. 

A company’s decision to purchase its own stocks will have an impact on its financial statements, so it is important for business owners to understand where treasury stock appears on their balance sheets and how it affects their overall financial health.

By understanding where treasury stocks belong on their financial statements, businesses can more accurately gauge their performance and make decisions accordingly.

Additionally, they can also be aware of how these purchases might affect certain metrics such as EPS or dividends paid out—which could ultimately influence investor decisions going forward.

Ultimately, understanding where treasury stocks appear on your financial statements can help you make more informed decisions about managing your assets now and in years to come.

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Treasury Stock

Published on :

21 Aug, 2024

Blog Author :

Wallstreetmojo Team

Edited by :

Aaron Crowe

Reviewed by :

Dheeraj Vaidya

What is Treasury Stock?

Treasury stocks are the set of shares that the issuing company has repurchased from the company's existing shareholders but are not retired. Thus, they are not considered while calculating the earnings per share or the company's dividends. However, it is vital for treasury stock accounting to reflect them in the financial statements of the company.

These are the shares reacquired by the issuing company from the shareholders but not yet retired by the company. They reduce shareholder equity. Treasury Shares do not represent an investment in the firm. Also, it does not receive a dividend and has no voting rights. These treasury shares are not considered when calculating dividends or earnings per share ( EPS ).

Table of contents

Treasury stock explained, treasury stock in the balance sheet, video explanation of treasury stock, reasons for share buy back, treasury stock vs capital stock, difference between treasury stocks and outstanding shares, treasury stock video, recommended articles.

Treasury stocks, also known as treasury shares or reacquired shares, represent shares of a company's stock that it has repurchased from the open market. Unlike outstanding shares held by investors, treasury stocks are held by the company itself, effectively becoming unissued shares. The decision to repurchase shares often stems from a company's belief that its stock is undervalued or as a strategic move to manipulate its capital structure.

One primary purpose of holding treasury stocks is to reissue them later potentially. This allows companies to raise capital quickly, especially during periods when they perceive their stock to be undervalued. Additionally, repurchasing shares can be a strategic method to distribute excess cash to shareholders, signaling confidence in the company's financial health.

However, while the treasury stock method offers strategic advantages, they also come with certain drawbacks. Holding a significant amount of treasury stocks can impact a company's earnings per share (EPS) calculation, potentially inflating the ratio. Additionally, large-scale stock repurchases can lead to reduced liquidity in the market for that particular stock.

Companies need to carefully consider the implications of holding treasury stocks, balancing the potential benefits of reissuing them for capital gains against the impact on financial metrics and market dynamics. Disclosure of treasury stock activities in financial statements is crucial for transparency and providing investors with a clear understanding of the company's capital structure.

The formula for treasury stock accounting is relatively straightforward and involves the cost of repurchasing shares from the open market. It is calculated by multiplying the number of repurchased shares by the average cost per share. Mathematically, it can be expressed as follows:

Treasury Stock = Number of Repurchased Shares x Average Cost per Share .

The company reports treasury Shares accounting at the end of the line items within the equity section. It is listed on the balance sheet as a negative number under shareholders' equity. When the company repurchases the stock, it records the expenditure due to repurchase in a contra-equity account. Thus, the direct effect of writing a treasury stock transaction is a reduction in the total amount of equity recorded on the balance sheet.

The two methods of accounting for treasury stock are the cost method and the par value method. In the cost method , the paid-in capital account is reduced in the balance sheet when treasury shares are purchased. Under the par value method during repurchase, the books will record it as the retirement of shares. Thereby, common stock debits and treasury stock credits. But in both methods, the transactions can’t increase the amount of retained earnings.

Now that we understand the basics and intricacies of the concept, let us explore the practical application through the examples below.

Examples #1

  Let us assume that Company ABC decides to reacquire some of its shares since these are currently undervalued in the open market. When Company ABC buys these shares back, then they become Treasury Stock. It must be kept in mind that if Company ABC decides to resell these, then the profit or losses are not recognized in the income statement of the company .

Suppose Company ABC has excess cash and sees that its stock in the market is trading below its intrinsic value. So it decides to buy back 1,000 shares of its stock at $60 for a total value of $60,000. The total sum of the company’s equity accounts, including common stock and retained earnings , is $1, 20,000. This repurchase of the stocks leads to a contra account . The $60,000 repurchase is deducted from the $1,20,000 equity account balance, leaving a difference of $60,000. Similarly, the cash account on the asset side of the balance sheet decreases by $60,000.

source: Colgate SEC Filings

We note from above that Colgate has been buying back shares each year.

• In 2014, Colgate bought back 23,131,081 shares. Due to share s issued for stock options and shares issued for restricted stock units, the balance of treasury stocks at the end of 2014 was 558,994,215 shares.
• Likewise, in 2015, Colgate bought back 22,802,784 shares, and in 2016, Colgate bought back 19,271,304 treasury shares.

There are numerous reasons behind the buyback of issued shares from the open market and the investors. Some of the reasons are listed below:

• Reselling Purpose - They are often kept aside as reserved stock to raise finances or for future investments. A company may utilize the treasury stock to acquire a competing company.
• For controlling interest - Due to buying back of stock, the number of outstanding shares in the open market is reduced, which leads to an increment in the value of the remaining shareholders' interest in the company. With the help of repurchasing, the company management can avoid sudden takeovers in case of failed acquisitions.
• Undervaluation - In some cases, the company's stock may be underpriced in the open market when the market is performing poorly. Buying back the stock usually pushes the share price positively, and the remaining shareholders eventually benefit.
• Retiring of Shares - If the treasury shares are labeled as retired, then they cannot be sold and are removed from the market circulation. It leads to a permanent reduction, thus forcing the remaining shares in the open market to serve as a larger percentage of the shareholders' ownership.
• Reducing the cost of capital - Shareholders lend capital to a company for its operations and expansion when it cannot generate more than the cost of equity in terms of return using that fund. The company is not making any economic profit . In that case, it is preferable to return some portion of the shareholder's fund and reduce the percentage of shareholding. It will help in reducing the cost of capital for the company and increase its value.
• Improvement of financial ratios - If the company has a positive reason for reacquiring stocks, then as an aftermath, the financial ration will improve. It, in turn, leads to an increase in return on assets (ROA) and return on equity (ROE) ratios . These ratios give a clear understanding of the positive company market performance.

Let us understand the distinctions between the treasury stock method and capital stock through the comparative points below.

• Treasury stock refers to shares of a company's own stock that have been repurchased from the open market and are held by the company itself.
• These shares are no longer outstanding and do not carry voting rights or receive dividends.
• Often repurchased when a company perceives its stock as undervalued or as part of a strategic move to manipulate its capital structure.
• Recorded as a contra-equity account on the balance sheet, reducing shareholders' equity.

Capital Stock

• Capital stock represents the total shares that a company is authorized to issue, including both outstanding shares held by investors and any treasury stock.
• Encompasses all classes of shares, including common and preferred shares, that constitute the ownership of the company.
• It serves as a means for the company to raise capital by issuing shares to investors.
• Appears in the shareholders' equity section of the balance sheet, reflecting the total ownership interest in the company.

To understand the concept of the treasury stock method better, it is vital to understand the differences between similar methods. Let us do so through the comparative table below.

This article has been a guide to what Treasury Stock is. Here we discuss treasury stocks in the balance sheet and its accounting, along with practical examples. We also discuss the differences between treasury and outstanding shares and why a company goes for buybacks. You can learn more about Corporate Finance here –

• Treasury Stock Method
• Stock Options vs RSU Differences
• Right Issue vs Bonus Issue
• Stocks vs Shares

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Treasury Stock Accounting and Examples

What is treasury stock accounting, treasury stock in accounting.

Treasury stock is referred to as the shares that the company (issuer) buys back from its shareholders. It is also known as treasury shares or reacquired stock . The result of this is that the total number of outstanding shares in the open market decreases, that is, shares owned by others, thereby returning their ownership to the company. These shares are issued but they are no longer outstanding and the company does not include them in the distribution of dividends or the calculation of earnings per share (EPS). It also does not have a vote at a shareholders’ meeting.

The issuer may then retire the stocks or resell the treasury shares at a later date. When determining the number of issued and outstanding shares reported in the company’s financial statements, treasury stock falls under the category of issue. The amount of cash a company pays to buy back treasury shares is recorded in a contra equity account and this appears in the equity section of the balance sheet. Treasury shares can either be common stock or preferred stock that the company reacquires.

The amount of treasury shares that a company should buy back is usually governed by the Securities and Exchange Commission of a nation or in other words, a nation’s regulatory body. Since public shareholders no longer possess these shares, they are not included in dividend payments or earnings per share calculations. Dividends are part of a company’s profit that is being paid out to stockholders in cash or stock. The earnings per share reflect the profitability of a company.

As earlier stated, treasury shares can be retired or resold in the open market. When shares are retired, they are permanently canceled and cannot be reissued in the future . Once these shares are retired, they are no longer recorded as treasury shares on the company’s financial statements. On the other hand, non-retired treasury shares can be reissued through stock dividends, employee compensation, or capital raising.

Treasury stock accounting

When a company initially issues stock, the equity section of the balance sheet is increased through a credit to common stock as well as the additional paid-in capital accounts. The common stock accounts reflect the par value of shares while the additional paid-in capital account shows the excess value received over the par value. Because of the double-entry bookkeeping, the offset of this journal entry is a debit to increase cash or other assets in the amount of the consideration that the shareholders received.

As earlier stated, treasury shares reduce the total equity of shareholders and are generally named treasury stock or equity reduction. There are two methods by which one can account for treasury shares. These methods are the cost method and the par value method .

Cost method of accounting for treasury stock

The cost method makes use of the value that the company paid during the repurchase of the shares and does not take into account their par value. Here, 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 minimum par value such as $1 or $2, but sell and be repurchased for more. The cost method is the most widely used and it is a very simple accounting method for the repurchase of stock.

Par value method for treasury stock accounting

Under the par value method, at the time of repurchase of shares, the treasury stock account is debited to decrease the total shareholders’ equity in the amount of the par value of shares that the company repurchased. The common stock additional paid-in capital account is also debited to reduce it by the amount originally that the shareholders paid in excess of par value.

The cash account is then credited to the total amount that the company paid out for the share repurchase. The account includes the net amount as either a debit or credit to the treasury additional paid-in capital account which depends on whether the company paid more when repurchasing the stock than the shareholders did initially. The par value method is oftentimes under the assumption that the treasury shares have either been or will be retired. Here, the treasury stock’s par value is subtracted from the paid-in capital.

Treasury stock example

A company had initially sold 5,000 shares of common stock with a $1 par value of $41 per share. It had $5,000 common stock which is 5,000 shares multiplied by $1 par value, and $200,000 common stock which is 5,000 shares x ($41 – $1) paid in excess of par on its balance sheet. This company has excess cash and feels that its stock is trading below its intrinsic value. Because of this, it decided to repurchase 1,000 shares of its stock at $50 for a total value of $50,000.

The repurchase of stocks brought about a treasury stock contra equity account. Under the cash method, the treasury account will be debited for $50,000, and the cash account credited for $50,000. Under the par value method, treasury stock will be debited for $1,000, that is, 1,000 shares multiplied by $1 par value. The common stock additional paid-in capital will be debited for $49,000 which is 1,000 shares x ($50 repurchase price – $1 par value) and cash will be credited for $50,000.

Under both the cash and the par value methods, the equity of the total shareholders is decreased by $50,000. Assuming that the total sum of this company’s equity accounts including common stock, additional paid-in capital, and retained earnings was $500,000 before the share buyback , the repurchase will bring the total shareholders’ equity down to $450,000.

Treasury stock on the balance sheet

The shareholders’ equity section has two major headings. These headings are the paid-in capital and retained earnings. Treasury stock is posted under its own heading in the stockholders’ equity section, which is below the retained earnings heading.

If there is a significant change in the company’s financial status from when the stock was initially sold, there may be a need for the stock to be revalued in order to accurately reflect the current value. The treasury stock account is debited while the cash account in the asset section is credited.

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Treasury Stock

Re-acquisition of company’s outstanding shares from investors

What is Treasury Stock?

Treasury stock, or reacquired stock, is the previously issued, outstanding shares of stock which a company repurchased or bought back from shareholders. The reacquired shares are then held by the company for its own disposition. They can either remain in the company’s possession to be sold in the future, or the business can retire the shares and they will be permanently out of market circulation.

Treasury stock is one of the various types of equity accounts reported on the balance sheet statement under the stockholders’ equity section as a contra-equity account.

Understanding Where Treasury Stocks Come From

Every company is authorized to issue a certain number of shares. This is referred to as “shares outstanding,” or the total shares that exist for a company. Of those outstanding shares, some shares are restricted (meaning they cannot be traded unless certain conditions are met) while most shares are publicly traded (known as the “float”).

Treasury stocks are shares that were originally part of “shares outstanding” but that have been repurchased by the company.

Rationale Behind Share Repurchases

There are several reasons why companies reacquire issued and outstanding shares from the investors.

1. For reselling

Treasury stock is often a form of reserved stock set aside to raise funds or pay for future investments. Companies may use treasury stock to pay for an investment or acquisition of competing businesses. These shares can also be reissued to existing shareholders to reduce dilution from incentive compensation plans for employees.

2. For controlling interest

The repurchase action lowers the number of outstanding shares, therefore, increasing the value of the remaining shareholders’ interest in the company. The reacquisition of stock can also prevent hostile takeovers when the company’s management does not want the acquisition deal to push through.

3. Undervaluation

When the market is not performing well, the company’s stock may be undervalued – buying back the shares will usually boost the share price and benefit the remaining shareholders.

4. Retiring of shares

When treasury stocks are retired, they can no longer be sold and are taken out of the market circulation. In turn, the share count is permanently reduced, which causes the remaining shares present in circulation to represent a larger percentage of shareholder ownership, including dividends and profits.

5. For improving financial ratios

If there is a sound motive for the buyback of stocks, the improvement of financial ratios may just be an after-effect of such good management decisions. This results in an increase in the return on assets (ROA) ratio and return on equity (ROE) ratio. This then illustrates positive company market performance.

What are the Limitations of Treasury Stock?

• No voting rights
• Not entitled to receive dividends
• Not included in the calculation of outstanding shares
• Do not exercise preemptive rights as a shareholder
• Not entitled to receive net assets in case the company liquidates
• In some countries, the number of treasury stocks held by companies is regulated – total treasury stock cannot exceed the maximum proportion of capitalization specified by law.

How do Companies Perform a Buyback of Stocks?

A stock buyback, or share repurchase, is one of the techniques used by management to reduce the number of outstanding shares circulating in the market. It benefits the company’s owners and investors because the relative ownership of the remaining shareholders increases. There are three methods by which a company may carry out the repurchase:

1. Tender offer

The company offers to repurchase a number of shares from the shareholders at a specified price it is willing to pay, which is most likely at a premium or above market price. The company will also disclose the duration for which this offer is valid, and shareholders are welcome to tender their shares to the company should they be willing to sell at the specified price.

2. Open market or direct repurchase

Direct buying of shares in the open market. When a company announces the repurchase of stocks, it often causes the share price to increase, which is perceived by the market as a positive outcome. The company then simply proceeds to purchase shares as other investors would on the market.

3. Dutch auction

In a Dutch auction , the company specifies a range, and the number of shares it wishes to repurchase. Shareholders are invited to offer their shares for sale at their personally desired price, within or below this range. The company will then purchase their desired number of shares for the lowest cost possible, by purchasing from shareholders who have offered at the lower end of the range.

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Module 13: Accounting for Corporations

Balance sheet presentation, learning outcomes.

• Illustrate the balance sheet presentation of stockholder’s equity

Let’s take another look at the most current regulatory reports for The Home Depot, Inc . On page 33 of the 2019 annual report, the company reported the following components of stockholders’ equity:

Let’s take a look at a side-by-side comparison of a sole proprietorship’s owner’s equity and that of a corporation:

It’s unlikely a sole proprietorship will be following all aspects of GAAP. It would be unlikely to include Other Comprehensive Gains and Losses unless a bank or other influential stakeholder [1] required full GAAP compliance. Other comprehensive gains and losses usually arise from changes in market value of short-term investments and adjustments that arise in translating information from subsidiaries that do business in other nations and therefore use other currencies (foreign currency translation).

In short, other than some differences in terminology and technical differences, the basic expanded version of the accounting equation still holds true:

A = L + E, where E = capital contributions − withdrawals + revenue − expenses.

For a corporation, it could be listed as:

Equity = paid-in capital from the sale of stock (par and in excess of par) − dividends and treasury stock + revenues and other comprehensive income − expenses and other comprehensive losses.

One final note: The balance in retained earnings is generally available for dividend declarations. Some companies state this fact. In some circumstances, however, there may be retained earnings restrictions . These make a portion of the balance currently unavailable for dividends. Restrictions result from one or more of these causes: legal, contractual, or voluntary. For instance, a contractual restriction may be the result of loan covenants. A voluntary restriction may be because of a board resolution. A legal restriction may be imposed as part of a lawsuit settlement. Companies generally disclose retained earnings restrictions in the notes to the financial statements.

In the next section, we’ll study the Statement of Changes in Stockholders’ Equity, but first, check your understanding of the balance sheet presentation.

Practice Question

• A stakeholder is different from a shareholder or stockholder. Employees, creditors, customers, government agencies, and a wide variety of other interested parties can be stakeholders. This means they have some kind of stake in the company and what it does (for instance, a not-for-profit concerned with the environment could be a stakeholder in a manufacturing firm). A shareholder/stockholder is an owner because they hold shares of stock. ↵
• Balance Sheet Presentation. Authored by : Joseph Cooke. Provided by : Lumen Learning. License : CC BY: Attribution

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16.3 Issuing and Accounting for Preferred Stock and Treasury Stock

Learning objectives.

At the end of this section, students should be able to meet the following objectives:

• Explain the difference between preferred stock and common stock.
• Discuss the distribution of dividends to preferred stockholders.
• Record the issuance of preferred stock.
• Define “treasury stock” and provide reasons for a corporation to spend its money to acquire treasury stock.
• Account for the purchase and resale of treasury stock, with both gains and losses occurring.

Question: Some corporations also issue a second type of capital stock referred to as preferred stock. Probably about 10–15 percent of companies in the United States have preferred stock outstanding but the practice is more prevalent in some industries . How is preferred stock different from common stock?

Answer: Preferred stock is another version of capital stock where the rights of those owners are set by the contractual terms of the stock certificate rather than state law. In effect, common stockholders are voluntarily surrendering one or more of their rights in hopes of enticing additional investors to contribute money to the corporation. For common stockholders, preferred stock is often another possible method of achieving financial leverage in the same manner as using money raised from bonds and notes.

The term “preferred stock” comes from the preference that is conveyed to these owners. They are being allowed to step in front of common stockholders when the specified rights are applied. A wide variety of benefits can be assigned to the holders of preferred shares, including additional voting rights, assured representation on the board of directors, and the right to residual assets if the company ever liquidates.

By far the most typical preference is to cash dividends. As mentioned earlier in this chapter, all common stockholders are entitled to share proportionally in any dividend distributions. However, if a corporation issues preferred stock with a stipulated dividend, that amount must be paid before any money is conveyed to the owners of common stock. No dividend is ever guaranteed, not even one on preferred shares. A dividend is only legally required if declared by the board of directors. But, if declared, the preferred stock dividend comes before any common stock dividend.

Common stock is often referred to as a residual ownership because these shareholders are entitled to all that remains after other claims have been settled including those of preferred stock.

The issuance of preferred stock is accounted for in the same way as common stock. Par value, though, often serves as the basis for specified dividend payments. Thus, the par value listed for a preferred share frequently approximates fair value. To illustrate, assume that a corporation issues ten thousand shares of preferred stock. A $100 per share par value is printed on each stock certificate. If the annual dividend is listed as 4 percent, $4 per year ($100 par value × 4 percent) must be paid on preferred stock before any distribution is made on the common stock.

If ten thousand shares of this preferred stock are each issued for $101 in cash ($1,010,000 in total), the company records the following journal entry.

Figure 16.5 Issue Ten Thousand Shares of $100 Par Value Preferred Stock for $101 per Share

Companies often establish two separate “capital in excess of par value” accounts—one for common stock and one for preferred stock. They are then frequently combined in reporting the balances within stockholders’ equity.

Link to multiple-choice question for practice purposes: http://www.quia.com/quiz/2093027.html

Question: An account called treasury stock is often found near the bottom of the shareholders’ equity section of the balance sheet. Treasury stock represents issued shares of a corporation’s own stock that have been reacquired. For example, the December 31, 2008, balance sheet for Viacom Inc. reports a negative balance of nearly $6 billion identified as treasury stock .

A 2004 story in the Wall Street Journal indicated that Viacom had been buying and selling its own stock for a number of years: “The $8 billion buyback program would enable the company to repurchase as much as 13 percent of its shares outstanding. The buyback follows a $3 billion stock-purchase program announced in 2002, under which 40.7 million shares were purchased ” (Flint, 2004).

Why does a company voluntarily give billions of dollars back to stockholders in order to repurchase its own stock? That is a huge amount of money leaving the company. Why not invest these funds in inventory, buildings, investments, research and development, and the like? Why does a corporation buy back its own shares as treasury stock?

Answer: Numerous possible reasons exist to justify spending money to reacquire an entity’s own stock. Several of these strategies are rather complicated and a more appropriate topic for an upper-level finance course. However, an overview of a few of these should be helpful in understanding the rationale for such transactions.

• As a reward for service, businesses often give shares of their stock to key employees or sell them shares at a relatively low price. In some states, using unissued shares for such purposes can be restricted legally. The same rules do not apply to shares that have been reacquired. Thus, a corporation might acquire treasury shares to have available as needed for compensation purposes.
• Acquisition of treasury stock can be used as a tactic to push up the market price of a company’s stock in order to please the remaining stockholders. Usually, a large scale repurchase (such as that made by Viacom) indicates that management believes the stock is undervalued at its current market price. Buying treasury stock reduces the supply of shares in the market and, according to economic theory, forces the price to rise. In addition, because of the announcement of the repurchase, outside investors often rush in to buy the stock ahead of the expected price increase. The supply of shares is decreased while demand for shares is increased. Stock price should go up. Not surprisingly, current stockholders often applaud the decision to buy treasury shares as they anticipate a jump in their investment values.
• Corporations can also repurchase shares of stock to reduce the risk of a hostile takeover. If another company threatens to buy enough shares to gain control, the board of directors of the target company must decide if acquisition is in the best interest of the stockholders 1 . If not, the target might attempt to buy up shares of its own treasury stock in hopes of reducing the number of owners in the market who are willing to sell their shares. It is a defensive strategy designed to make the takeover more difficult to accomplish. Plus, as mentioned above, buying back treasury stock should drive the price up, making purchase more costly for the predator.

Question: To illustrate the financial reporting of treasury stock, assume that the Chauncey Company has issued ten million shares of its $1 par value common stock at an average price of $3.50 per share. The company now reacquires three hundred thousand of these shares for $4 each . How is the acquisition of treasury stock reported?

Answer: Under U.S. GAAP, several methods are allowed for reporting the purchase of treasury stock. Most companies appear to use the cost method because of its simplicity. The acquisition of these shares by Chauncey is recorded at the $1.2 million (three hundred thousand shares at $4 each) that was paid.

Figure 16.6 Purchase of Three Hundred Thousand Shares of Treasury Stock at a Cost of $4 Each

Because the cost of treasury stock represents assets that have left the business, this account balance is shown within stockholders’ equity as a negative amount, reflecting a decrease in net assets instead of an increase.

Except for possible legal distinctions, treasury stock is the equivalent of unissued stock. It does not receive dividends and has no voting privileges.

Question: Treasury shares can be held forever or eventually sold at prices that might vary greatly from original cost. If sold for more, is a gain recognized? If sold for less, is a loss reported? What is the impact on a corporation’s financial statements if treasury stock is reissued? To illustrate, assume that Chauncey Company subsequently sells one hundred thousand shares of its treasury stock for $5.00 each. That is $1.00 more than these shares cost to reacquire. Is this excess reported as a gain within net income?

Answer: As discussed previously, transactions in a corporation’s own stock are considered expansions and contractions of the ownership and never impact reported net income. The buying and selling of capital stock are viewed as fundamentally different from the buying and selling of assets. Therefore, this reissuance is recorded by Chauncey through the following journal entry.

Figure 16.7 Sale of One Hundred Thousand Shares of Treasury Stock Costing $4 Each for $5 per Share

The “capital in excess of cost-treasury stock” is the same type of account as the “capital in excess of par value” that was recorded in connection with the issuance of both common and preferred stocks. Within stockholders’ equity, these accounts can be grouped or reported separately.

Question: Assume that Chauncey later sells another one hundred thousand of the treasury shares, but this time for only $2.60 each. The proceeds in this transaction are below the acquisition cost of $4 per share . What recording is made if treasury stock is sold at the equivalent of a loss?

Answer: Interestingly, the selling of treasury stock below cost is a transaction not well covered in U.S. GAAP. Authoritative rules fail to provide a definitive rule for reporting this reduction except that stockholders’ equity should be decreased with no direct impact recorded in net income.

The most common approach seems to be to first remove any capital in excess of cost recorded by the sale of earlier shares of treasury stock at above cost. If that balance is not large enough to absorb the entire reduction, a decrease is made in retained earnings as shown below. The $100,000 balance in capital in excess of cost-treasury stock was created in the previous journal entry.

Figure 16.8 Sale of One Hundred Thousand Shares of Treasury Stock Costing $4 Each for $2.60 per Share

One outcome of this handling should be noted. In the early chapters of this textbook, “retained earnings” was defined as all income reported over the life of a business less all dividend distributions to the owners. Apparently, this definition is not absolutely correct in all possible cases. In the above journal entry, retained earnings are also reduced as a result of a stock transaction where a loss occurred that could not otherwise be reported.

Link to multiple-choice question for practice purposes: http://www.quia.com/quiz/2093028.html

Link to multiple-choice question for practice purposes: http://www.quia.com/quiz/2093007.html

Key Takeaway

A corporation can issue preferred stock as well as common stock. Preferred shares are given specific rights that come before those of common stockholders. Usually, these rights involve the distribution of dividends. A set payment amount is often required before common stockholders receive any dividend. Subsequently, capital stock shares can be bought back from investors for a number of reasons. If so, they are known as treasury stock. In acquiring these shares, money flows out of the company so the account is reported as a negative balance within stockholders’ equity. If resold, the treasury stock account is reduced and capital in excess of cost is recognized if an amount above cost is received. However, if resold at a loss, any previous capital in excess of cost balance is removed followed by a possible reduction in retained earnings.

1 If the board of directors does agree to the purchase of the corporation by an outside party, the two sides then negotiate a price for the shares as well as any other terms of the acquisition.

Flint, J., “Viacom Plans Stock Buy Back, Swings to Loss on Blockbuster,” The Wall Street Journal , October 29, 2004, B-2.

Financial Accounting Copyright © 2015 by University of Minnesota is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License , except where otherwise noted.

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5.9 Treasury Stock

Sometimes a corporation decides to purchase its own stock in the market. These shares are referred to as treasury stock. A company might purchase its own outstanding stock for a number of possible reasons. It can be a strategic maneuver to prevent another company from acquiring a majority interest or preventing a hostile takeover. A purchase can also create demand for the stock, which in turn raises the market price of the stock. Sometimes companies buy back shares to be used for employee stock options or profit-sharing plans.

Acquiring Treasury Stock

When a company purchases treasury stock, it is reflected on the balance sheet in a contra equity account. As a contra equity account, Treasury Stock has a debit balance, rather than the normal credit balances of other equity accounts. The total cost of treasury stock reduces total equity. In substance, treasury stock implies that a company owns shares of itself. However, owning a portion of one’s self is not possible. Treasury shares do not carry the basic common shareholder rights because they are not outstanding. Dividends are not paid on treasury shares, they provide no voting rights, and they do not receive a share of assets upon liquidation of the company. There are two methods possible to account for treasury stock—the cost method, which is discussed here, and the par value method, which is a more advanced accounting topic. The cost method is so named because the amount in the Treasury Stock account at any point in time represents the number of shares held in treasury times the original cost paid to acquire each treasury share.

Assume Duratech’s net income for the first year was $3,100,000, and that the company has 12,500 shares of common stock issued. During May, the company’s board of directors authorizes the repurchase of 800 shares of the company’s own common stock as treasury stock. Each share of the company’s common stock is selling for $25 on the open market on May 1, the date that Duratech purchases the stock. Duratech will pay the market price of the stock at $25 per share times the 800 shares it purchased, for a total cost of $20,000. The following journal entry is recorded for the purchase of the treasury stock under the cost method.

Even though the company is purchasing stock, there is no asset recognized for the purchase. An entity cannot own part of itself, so no asset is acquired. Immediately after the purchase, the equity section of the balance sheet ( Figure 5.62 ) will show the total cost of the treasury shares as a deduction from total stockholders’ equity.

Notice on the partial balance sheet that the number of common shares outstanding changes when treasury stock transactions occur. Initially, the company had 10,000 common shares issued and outstanding. The 800 repurchased shares are no longer outstanding, reducing the total outstanding to 9,200 shares.

CONCEPTS IN PRACTICE

Reporting treasury stock for nestlé holdings group.

Nestlé Holdings Group  sells a number of major brands of food and beverages including  Gerber ,  Häagen-Dazs ,  Purina , and  Lean Cuisine . The company’s statement of stockholders’ equity shows that it began with 990 million Swiss francs (CHF) in treasury stock at the beginning of 2016. In 2017, it acquired additional shares at a cost of 3,547 million CHF, raising its total treasury stock to 4,537 million CHF at the end of 2017, primarily due to a share buy-back program. 15

Reissuing Treasury Stock above Cost

Management typically does not hold treasury stock forever. The company can resell the treasury stock at cost, above cost, below cost, or retire it. If La Cantina reissues 100 of its treasury shares at cost ($25 per share) on July 3, a reversal of the original purchase for the 100 shares is recorded. This has the effect of increasing an asset, Cash, with a debit, and decreasing the Treasury Stock account with a credit. The original cost paid for each treasury share, $25, is multiplied by the 100 shares to be resold, or $2,500. The journal entry to record this sale of the treasury shares at cost is:

If the treasury stock is resold at a price higher than its original purchase price, the company debits the Cash account for the amount of cash proceeds, reduces the Treasury Stock account with a credit for the cost of the treasury shares being sold, and credits the Paid-in Capital from Treasury Stock account for the difference. Even though the difference—the selling price less the cost—looks like a gain, it is treated as additional capital because gains and losses only result from the disposition of economic resources (assets). Treasury Stock is not an asset. Assume that on August 1, La Cantina sells another 100 shares of its treasury stock, but this time the selling price is $28 per share. The Cash Account is increased by the selling price, $28 per share times the number of shares resold, 100, for a total debit to Cash of $2,800. The Treasury Stock account decreases by the cost of the 100 shares sold, 100 × $25 per share, for a total credit of $2,500, just as it did in the sale at cost. The difference is recorded as a credit of $300 to Additional Paid-in Capital from Treasury Stock.

Reissuing Treasury Stock Below Cost

If the treasury stock is reissued at a price below cost, the account used for the difference between the cash received from the resale and the original cost of the treasury stock depends on the balance in the Paid-in Capital from Treasury Stock account. Any balance that exists in this account will be a credit. The transaction will require a debit to the Paid-in Capital from Treasury Stock account to the extent of the balance. If the transaction requires a debit greater than the balance in the Paid-in Capital account, any additional difference between the cost of the treasury stock and its selling price is recorded as a reduction of the Retained Earnings account as a debit. If there is no balance in the Additional Paid-in Capital from Treasury Stock account, the entire debit will reduce retained earnings.

Assume that on October 9, La Cantina sells another 100 shares of its treasury stock, but this time at $23 per share. Cash is increased for the selling price, $23 per share times the number of shares resold, 100, for a total debit to Cash of $2,300. The Treasury Stock account decreases by the cost of the 100 shares sold, 100 × $25 per share, for a total credit of $2,500. The difference is recorded as a debit of $200 to the Additional Paid-in Capital from Treasury Stock account. Notice that the balance in this account from the August 1 transaction was $300, which was sufficient to offset the $200 debit. The transaction is recorded as:

Treasury stock transactions have no effect on the number of shares authorized or issued. Because shares held in treasury are not outstanding, each treasury stock transaction will impact the number of shares outstanding. A corporation may also purchase its own stock and retire it. Retired stock reduces the number of shares issued. When stock is repurchased for retirement, the stock must be removed from the accounts so that it is not reported on the balance sheet. The balance sheet will appear as if the stock was never issued in the first place.

Understanding Stockholders’ Equity

Wilson Enterprises reports the following stockholders’ equity:

Based on the partial balance sheet presented, answer the following questions:

• At what price was each share of treasury stock purchased?
• What is reflected in the additional paid-in capital account?
• Why is there a difference between the common stock shares issued and the shares outstanding?

A. $240,000 ÷ 20,000 = $12 per share. B. The difference between the market price and the par value when the stock was issued. C. Treasury stock.

Long Descriptions

La Cantina, Partial Stockholders’ Equity Section of the Balance Sheet, For the Month Ended December 31, 2020. Stockholders’ Equity: 5 percent Preferred stock, $8 par value, 1,000 shares authorized, 1,000 shares issued and outstanding $8,000. Additional paid-in capital from preferred stock 37,000. Common Stock, $1.50 par value, 20,000 shares authorized, 10,000 issued and outstanding $15,000. Additional Paid-in capital from common 70,000. Retained Earnings 31,000. Total 161,000. Treasury stock (800 shares) at cost 20,000. Total stockholders’ equity $141,000. Return

Nestle Holding Group, Consolidated Statement of Changes in Equity, For the Year Ended December 31, 2017. Millions (CHF), Share Capital, Treasury Shares, Paid-in Capital, Other, Total Equity (respectively): Equity as of December 31, 2016, 311, (990), 82,870, (16,210) 65,981. Profit for the year, -, -, 7,538, -, 7,538. Other comprehensive income, -, -, 252, -, 252. Dividends, -, -, (7,468), -, (7,468). Treasury shares, -, (3,719), 113, -, (3,606). Other, -, 172, 869, (961), 80. Equity at December 31, 2017, 311, (4,537), 84,174, (17,171), 62,777. Return

Preferred stock, $100 par value, 10,000 shares authorized, 10,000 shares issued and outstanding $1,000,000. Common Stock, $1 par value, 2,000,000 shares authorized, 1,200,000 issued and 1,180,000 outstanding $1,200,000. Additional Paid-in capital 16,800,000. Retained Earnings 3,670,000. Total 22,670,000. Treasury stock (20,000 shares) (240,000). Total Stockholders’ Equity $22,430,000. Return

• 15   Nestlé. “Annual Report 2017.” 2017. https://www.nestle.com/investors/annual-report

Financial and Managerial Accounting Copyright © 2021 by Lolita Paff is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License , except where otherwise noted.

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Common Journal Entries for Treasury Stock Under GAAP

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Introduction, definition of treasury stock.

In this article, we’ll cover common journal entries for treasury stock under GAAP. Treasury stock refers to shares that were once part of the outstanding shares of a company but were later reacquired by the company itself. These shares are held by the company and may be reissued or retired at a later date. Treasury stock is not considered when calculating dividends or earnings per share (EPS) and does not carry voting rights. Essentially, it represents the portion of shares that a company keeps in its own treasury, which can be used for various corporate purposes, such as employee compensation plans or to prevent hostile takeovers.

Importance of Understanding Treasury Stock Transactions

Understanding treasury stock transactions is crucial for several reasons:

• Financial Reporting Accuracy : Accurate accounting for treasury stock is essential to ensure the integrity of financial statements. It impacts key financial metrics such as shareholders’ equity and EPS.
• Corporate Strategy : Companies may repurchase shares as part of their strategic initiatives to manage capital structure, signal confidence in their future prospects, or prevent takeovers. Proper accounting for these transactions reflects the company’s strategic decisions.
• Regulatory Compliance : Adhering to GAAP standards for treasury stock transactions ensures compliance with regulatory requirements, thereby avoiding legal issues and potential penalties.
• Stakeholder Communication : Transparent reporting of treasury stock activities helps maintain investor confidence and provides stakeholders with a clear understanding of the company’s financial health and management decisions.

Overview of GAAP Standards Relevant to Treasury Stock

Under Generally Accepted Accounting Principles (GAAP), there are specific guidelines and standards that govern the accounting and reporting of treasury stock. The two primary methods recognized by GAAP for accounting for treasury stock transactions are the cost method and the par value method.

• Cost Method : This method records the treasury stock at the cost at which the shares were repurchased. It involves debiting the Treasury Stock account and crediting Cash. Any reissuance of these shares affects additional paid-in capital based on the difference between the reissuance price and the cost.
• Par Value Method : Under the par value method, treasury stock is recorded at its par value, and the excess of the repurchase cost over the par value is recorded in additional paid-in capital or retained earnings. This method can have a more significant impact on the various equity accounts compared to the cost method.

In addition to these methods, GAAP requires detailed disclosures about treasury stock transactions in the notes to the financial statements. These disclosures include the number of shares held as treasury stock, the reasons for share repurchases, and the impact of these transactions on shareholders’ equity. Such transparency ensures that investors and other stakeholders have a comprehensive understanding of the company’s equity transactions and overall financial position.

Methods of Accounting for Treasury Stock

Cost method.

The cost method is one of the most commonly used methods for accounting for treasury stock. Under this method, the treasury stock is recorded at the cost at which the shares were repurchased. Here are the key aspects and journal entries involved in the cost method:

Purchase of Treasury Stock

When a company repurchases its own shares, the transaction is recorded by debiting the Treasury Stock account and crediting the Cash account. The Treasury Stock account is a contra equity account, meaning it reduces total shareholders’ equity.

Example Journal Entry: If a company repurchases 1,000 shares of its stock at $10 per share, the entry would be:

Treasury Stock $10,000 Cash $10,000

Reissuance of Treasury Stock Above Cost

If the repurchased shares are reissued at a price higher than the repurchase cost, the excess is credited to Additional Paid-In Capital (APIC).

Example Journal Entry: If the company reissues 500 of the treasury shares at $15 per share, the entry would be:

Cash $7,500 Treasury Stock $5,000 Additional Paid-In Capital $2,500

Reissuance of Treasury Stock Below Cost

If the treasury shares are reissued at a price lower than the repurchase cost, the difference is first debited to Additional Paid-In Capital, and if that balance is insufficient, to Retained Earnings.

Example Journal Entry: If the company reissues 500 of the treasury shares at $8 per share, the entry would be:

Cash $4,000 Additional Paid-In Capital $1,000 Retained Earnings $1,000 Treasury Stock $6,000

Par Value Method

The par value method accounts for treasury stock transactions at the par value of the shares, and any difference between the repurchase price and the par value is recorded in additional paid-in capital or retained earnings.

Under the par value method, the Treasury Stock account is debited for the par value of the shares, and the additional paid-in capital or retained earnings is adjusted for the difference between the repurchase cost and the par value.

Example Journal Entry: If a company with a $5 par value repurchases 1,000 shares at $10 per share, the entry would be:

Treasury Stock (at par) $5,000 Additional Paid-In Capital $5,000 Cash $10,000

Reissuance of Treasury Stock Above Par Value

When reissuing treasury stock above the par value, the cash received is credited, and any difference between the reissuance price and the par value is credited to additional paid-in capital.

Cash $7,500 Treasury Stock (at par) $2,500 Additional Paid-In Capital $5,000

Reissuance of Treasury Stock Below Par Value

If the treasury shares are reissued below the par value, the difference is debited to Additional Paid-In Capital or Retained Earnings, similar to the treatment in the cost method.

Cash $4,000 Additional Paid-In Capital $1,500 Retained Earnings $500 Treasury Stock (at par) $2,500

Comparison and Implications

The cost method is simpler and more commonly used because it directly associates the cost with the treasury stock account. The par value method, while less common, can provide a more nuanced view of the impact on additional paid-in capital and retained earnings. Both methods require careful tracking and reporting to ensure compliance with GAAP and accurate financial statements.

Initial Purchase of Treasury Stock

Journal entry for purchase under cost method.

The cost method records the treasury stock at the price paid to repurchase the shares. This method is straightforward and directly links the cost to the treasury stock account. When a company buys back its shares, the following journal entry is made:

Example: If a company repurchases 1,000 shares at $10 per share, the journal entry would be:

• Explanation:
• Treasury Stock : This account is debited for the total cost of the repurchased shares (1,000 shares * $10 per share = $10,000).
• Cash : This account is credited because the company is using cash to buy back the shares.

The treasury stock account is a contra equity account, which means it reduces the total shareholders’ equity on the balance sheet.

Journal Entry for Purchase Under Par Value Method

Under the par value method, the treasury stock is recorded at its par value, and the difference between the repurchase price and the par value is allocated to additional paid-in capital or retained earnings. This method requires tracking both the par value and the cost differences separately.

Example: If a company with a $5 par value repurchases 1,000 shares at $10 per share, the journal entry would be:

• Treasury Stock (at par) : This account is debited for the total par value of the repurchased shares (1,000 shares * $5 par value = $5,000).
• Additional Paid-In Capital : This account is debited for the difference between the repurchase cost and the par value of the shares ([1,000 shares * ($10 – $5)] = $5,000).
• Cash : This account is credited for the total cost of repurchasing the shares (1,000 shares * $10 per share = $10,000).

This method involves more detailed accounting, as it requires adjusting both the treasury stock and additional paid-in capital accounts to reflect the par value and the excess cost.

Reissuance of Treasury Stock

Reissuance above cost.

When a company reissues treasury stock at a price higher than the repurchase cost, it results in a gain that is credited to Additional Paid-In Capital (APIC). This transaction does not affect the income statement since gains and losses on treasury stock transactions are not recognized in earnings but are directly adjusted in equity accounts.

If a company reissues 500 shares of treasury stock at $15 per share that were originally repurchased at $10 per share, the journal entry under the cost method would be:

• Cash : This account is debited for the total cash received from the reissuance of the shares (500 shares * $15 per share = $7,500).
• Treasury Stock : This account is credited for the cost of the reissued shares (500 shares * $10 per share = $5,000).
• Additional Paid-In Capital : This account is credited for the excess amount received over the cost (500 shares * ($15 – $10) = $2,500).

Reissuance Below Cost

When treasury stock is reissued at a price lower than the repurchase cost, the difference is first debited to Additional Paid-In Capital to the extent that there is a balance available. If APIC is insufficient, the remaining amount is debited to Retained Earnings.

If the same company reissues 500 shares of treasury stock at $8 per share that were originally repurchased at $10 per share, the journal entry under the cost method would be:

• Cash : This account is debited for the total cash received from the reissuance of the shares (500 shares * $8 per share = $4,000).
• Additional Paid-In Capital : This account is debited for the available balance (assuming $1,000 is available in APIC).
• Retained Earnings : This account is debited for the remaining shortfall (500 shares * ($10 – $8) – $1,000 APIC = $1,000).
• Treasury Stock : This account is credited for the cost of the reissued shares (500 shares * $10 per share = $6,000).

Journal Entries for Reissuance Under Both Methods

Reissuance Above Cost:

Reissuance Below Cost:

Under the par value method, treasury stock is recorded at par value, and the difference between the reissuance price and the par value is adjusted in additional paid-in capital or retained earnings.

Reissuance Above Par Value:

If a company reissues 500 shares of treasury stock at $15 per share with a par value of $5 per share, the journal entry would be:

• Cash : This account is debited for the total cash received (500 shares * $15 per share = $7,500).
• Treasury Stock (at par) : This account is credited for the par value of the reissued shares (500 shares * $5 par value = $2,500).
• Additional Paid-In Capital : This account is credited for the excess amount over the par value (500 shares * ($15 – $5) = $5,000).

Reissuance Below Par Value:

If the company reissues 500 shares at $8 per share with a par value of $5 per share, the journal entry would be:

• Cash : This account is debited for the total cash received (500 shares * $8 per share = $4,000).
• Additional Paid-In Capital : This account is debited for the available balance.
• Retained Earnings : This account is debited for the shortfall.

These journal entries demonstrate how the reissuance of treasury stock impacts the financial statements under both the cost method and the par value method, ensuring compliance with GAAP.

Retirement of Treasury Stock

Explanation of retirement.

Retirement of treasury stock refers to the process where a company permanently cancels its repurchased shares, reducing the total number of outstanding shares. Unlike reissuance, retired shares cannot be reissued or resold by the company. Retirement of treasury stock can have several strategic benefits, such as reducing dilution of existing shareholders’ equity, improving financial ratios, and signaling confidence in the company’s future prospects. When shares are retired, the company must adjust its equity accounts to reflect the decrease in issued and outstanding shares.

Journal Entries for Retirement Under Both Methods

Under the cost method, when treasury stock is retired, the company must eliminate the treasury stock account and adjust the additional paid-in capital or retained earnings, depending on whether the shares were initially issued at a premium or discount.

Example: If a company retires 1,000 shares of treasury stock that were repurchased at $10 per share and originally issued at $8 per share, the journal entry would be:

Common Stock (at par) $8,000 Additional Paid-In Capital $2,000 Treasury Stock $10,000

• Common Stock (at par) : This account is debited for the par value of the retired shares (1,000 shares * $8 par value = $8,000).
• Additional Paid-In Capital : This account is debited for the excess amount over the par value (1,000 shares * ($10 – $8) = $2,000).
• Treasury Stock : This account is credited for the cost of the retired shares (1,000 shares * $10 per share = $10,000).

If the shares were originally issued at a higher price than the repurchase cost, the additional paid-in capital would be adjusted accordingly.

Under the par value method, the retirement of treasury stock involves adjusting the treasury stock at par value and any additional paid-in capital or retained earnings associated with the repurchase price.

Example: If a company retires 1,000 shares of treasury stock that were repurchased at $10 per share and have a par value of $5 per share, the journal entry would be:

Common Stock (at par) $5,000 Additional Paid-In Capital $5,000 Treasury Stock $10,000

• Common Stock (at par) : This account is debited for the par value of the retired shares (1,000 shares * $5 par value = $5,000).
• Additional Paid-In Capital : This account is debited for the excess amount over the par value (1,000 shares * ($10 – $5) = $5,000).

If the shares were repurchased at a higher price than the par value, the difference would be debited to additional paid-in capital or retained earnings as necessary.

Summary of Journal Entries for Retirement

• When repurchase cost equals original issue price:

Common Stock (at par) XXX Treasury Stock XXX

• When repurchase cost exceeds original issue price:

Common Stock (at par) XXX Additional Paid-In Capital XXX Treasury Stock XXX

• When repurchase cost is less than original issue price:

Common Stock (at par) XXX Treasury Stock XXX Additional Paid-In Capital XXX

• When repurchase cost equals par value:
• When repurchase cost exceeds par value:
• When repurchase cost is less than par value:

The retirement of treasury stock reduces the number of shares outstanding and impacts shareholders’ equity. Properly accounting for these transactions is crucial for accurate financial reporting and compliance with GAAP.

Effect of Treasury Stock Transactions on Financial Statements

Impact on shareholders’ equity.

Treasury stock transactions have a significant impact on a company’s shareholders’ equity. Here’s how:

• Example : If a company buys back shares worth $50,000, the treasury stock account is debited by $50,000, decreasing the overall equity.
• Example : Reissuing treasury stock at a higher price than the repurchase price increases APIC.
• Effect on Retained Earnings : If the APIC account does not have sufficient balance to absorb losses from reissuing treasury stock below the repurchase price, retained earnings are used to offset the difference. This reduces retained earnings and consequently total shareholders’ equity.

Overall, treasury stock transactions can either dilute or enhance shareholders’ equity based on the repurchase and reissuance prices relative to the original issue prices.

Impact on Earnings Per Share (EPS)

Earnings Per Share (EPS) is a key financial metric that is directly influenced by treasury stock transactions. Here’s how it works:

• Example : If a company with 1,000,000 outstanding shares repurchases 100,000 shares, the outstanding shares decrease to 900,000, thus increasing the EPS.
• Anti-Dilutive Effect : By reducing the number of shares available in the market, the EPS figure can increase, presenting a more favorable view of the company’s profitability per share. This can be an attractive move for investors and can potentially boost the company’s stock price.
• No Direct Impact on Net Income : Treasury stock transactions do not affect the net income as gains or losses on treasury stock are not included in the income statement. However, the reduction in shares outstanding due to repurchase can have a significant positive effect on EPS calculations.

Presentation in the Balance Sheet

Treasury stock must be presented in the balance sheet in a specific manner according to GAAP:

• Contra Equity Account : Treasury stock is listed as a contra equity account within the shareholders’ equity section, meaning it reduces the total equity. It is usually presented below retained earnings and additional paid-in capital but above total equity.
• Historical Cost Basis : Treasury stock is reported at the repurchase cost, not at its current market value. This cost basis remains constant until the shares are reissued or retired.
• Disclosure of Treasury Stock : The number of shares held as treasury stock and the cost associated with them must be disclosed. Companies often provide this information in the notes to the financial statements for transparency.
• Example: A balance sheet might show treasury stock as follows: Shareholders’ Equity: Common Stock $500,000 Additional Paid-In Capital $200,000 Retained Earnings $300,000 Treasury Stock (at cost, 10,000 shares) ($100,000) Total Shareholders’ Equity $900,000

Proper presentation ensures that stakeholders are aware of the extent of treasury stock transactions and their impact on the company’s financial health. Accurate accounting and reporting of treasury stock according to GAAP standards are crucial for maintaining the integrity of financial statements and providing clear and useful information to investors and other users of financial reports.

Disclosure Requirements

Disclosure in financial statements.

Proper disclosure of treasury stock transactions in financial statements is essential for transparency and compliance with GAAP. Companies must provide sufficient information to enable stakeholders to understand the nature and impact of treasury stock activities. Here are the primary requirements for disclosure:

• Balance Sheet Presentation : Treasury stock must be shown as a contra equity account, reducing total shareholders’ equity. The cost of treasury stock is presented in the shareholders’ equity section, and the number of shares held as treasury stock should be disclosed either on the face of the balance sheet or in the accompanying notes.
• Statement of Changes in Equity : Any changes in the treasury stock account during the reporting period should be reflected in the statement of changes in equity. This includes purchases, reissuances, and retirements of treasury stock, with the respective amounts and number of shares involved.
• Statement of Cash Flows : Cash flows related to treasury stock transactions should be included in the financing activities section of the statement of cash flows. This helps stakeholders understand the cash impact of buying back or reissuing shares.

Notes to Financial Statements

Detailed information about treasury stock transactions should be provided in the notes to the financial statements. These notes offer additional context and explanations that are not included in the primary financial statements. Key disclosures include:

• Nature and Purpose : A description of the nature and purpose of treasury stock transactions, including reasons for repurchases and reissuances. This may include explanations related to employee compensation plans, strategic initiatives, or efforts to improve financial ratios.
• Number of Shares and Amounts : Disclosure of the number of shares held as treasury stock, the total cost of these shares, and changes during the reporting period. This includes details of shares repurchased, reissued, or retired, along with the respective costs.
• Method of Accounting : An explanation of the method used to account for treasury stock transactions, whether the cost method or the par value method. This helps stakeholders understand how the transactions are reflected in the financial statements.
• Impact on Equity : Information on how treasury stock transactions have affected shareholders’ equity. This includes the impact on additional paid-in capital and retained earnings, especially in cases where reissuance occurs below cost or par value.
• Restrictions and Limitations : Disclosure of any legal or contractual restrictions on treasury stock. This may include limitations on the number of shares that can be repurchased or reissued and any conditions that must be met.

Example Note Disclosure:

Note X: Treasury Stock As of December 31, 2023, the company held 10,000 shares of treasury stock at a total cost of $100,000. During the year, the company repurchased 5,000 shares at $12 per share and reissued 2,000 shares at $15 per share. The treasury stock is accounted for using the cost method. The repurchase of treasury stock is primarily for use in the company’s employee compensation plans and to improve financial ratios. The impact of these transactions on shareholders’ equity is as follows: – Additional Paid-In Capital increased by $6,000 due to reissuance above cost. – Retained Earnings was not affected by the reissuance as it was above cost. There are no legal restrictions on the repurchase or reissuance of treasury stock. However, the company aims to maintain a maximum of 15,000 shares as treasury stock at any given time.

By providing clear and comprehensive disclosures in the financial statements and notes, companies ensure that stakeholders have a full understanding of treasury stock transactions and their implications for the company’s financial position and performance. This transparency is crucial for maintaining investor confidence and complying with GAAP requirements.

Examples and Illustrations

Detailed examples of journal entries.

To better understand the accounting for treasury stock transactions, let’s look at some detailed examples of journal entries for different scenarios. These examples cover the initial purchase, reissuance above and below cost, and retirement of treasury stock under both the cost and par value methods.

Example 1: Purchase of Treasury Stock

• A company repurchases 1,000 shares at $10 per share.

Example 2: Reissuance of Treasury Stock Above Cost

• The company reissues 500 shares at $15 per share.

Example 3: Reissuance of Treasury Stock Below Cost

• The company reissues 500 shares at $8 per share. Assuming the Additional Paid-In Capital balance available is $1,000.

Example 4: Retirement of Treasury Stock

• The company retires 1,000 shares that were repurchased at $10 per share and originally issued at $8 per share.
• A company with a $5 par value repurchases 1,000 shares at $10 per share.

Example 2: Reissuance of Treasury Stock Above Par Value

Example 3: Reissuance of Treasury Stock Below Par Value

• The company reissues 500 shares at $8 per share. Assuming the Additional Paid-In Capital balance available is $1,500.
• The company retires 1,000 shares that were repurchased at $10 per share and have a par value of $5 per share.

Illustrative Case Study

To further illustrate the accounting for treasury stock, let’s walk through a case study involving multiple transactions over a year.

Background: XYZ Corporation has a $1 par value per share and decides to engage in several treasury stock transactions.

Transaction 1: Initial Purchase

• January 15: XYZ repurchases 2,000 shares at $12 per share using the cost method.

Treasury Stock $24,000 Cash $24,000

Transaction 2: Reissuance Above Cost

• March 10: XYZ reissues 1,000 shares at $15 per share.

Cash $15,000 Treasury Stock $12,000 Additional Paid-In Capital $3,000

Transaction 3: Reissuance Below Cost

• May 5: XYZ reissues 500 shares at $10 per share. Assuming APIC balance available is $2,000.

Cash $5,000 Additional Paid-In Capital $1,000 Retained Earnings $1,000 Treasury Stock $6,000

Transaction 4: Retirement of Treasury Stock

• December 20: XYZ retires the remaining 500 shares repurchased at $12 per share, originally issued at $1 par value.

Common Stock (at par) $500 Additional Paid-In Capital $5,500 Treasury Stock $6,000

Impact on Financial Statements:

• Treasury Stock: Initially, $24,000, reduced by $18,000 ($12,000 + $6,000) due to reissuances and retirement, leaving $6,000.
• Additional Paid-In Capital: Increased by $3,000 from reissuance above cost and reduced by $1,000 due to reissuance below cost, and adjusted by $5,500 during retirement.
• Retained Earnings: Reduced by $1,000 due to reissuance below cost.
• Reflects the repurchase, reissuance, and retirement of treasury stock, with detailed changes in the treasury stock and APIC accounts.
• Detailed disclosures regarding the number of shares repurchased, reissued, and retired, along with their respective costs and purposes.

This case study demonstrates the comprehensive impact of treasury stock transactions on the financial statements and highlights the importance of accurate accounting and disclosure for maintaining transparency and compliance with GAAP.

Common Mistakes and Pitfalls

Errors to avoid in accounting for treasury stock.

Accounting for treasury stock can be complex, and several common mistakes can occur. Avoiding these errors is crucial for accurate financial reporting and compliance with GAAP. Here are some of the most frequent mistakes:

• Incorrectly Classifying Treasury Stock : Failing to record treasury stock as a contra equity account can lead to overstated shareholders’ equity. Treasury stock should always reduce total equity and not be classified as an asset.
• Not Using the Correct Method : Confusing the cost method with the par value method can result in incorrect journal entries and financial statements. Each method has distinct journal entries and effects on equity accounts.
• Ignoring the Impact on Additional Paid-In Capital and Retained Earnings : When reissuing treasury stock, not properly adjusting APIC and retained earnings, especially when reissuing below cost, can lead to inaccurate equity balances.
• Failure to Disclose Necessary Information : Inadequate disclosure of treasury stock transactions in the financial statements and notes can mislead stakeholders. It’s essential to provide comprehensive details about the number of shares, cost, and reasons for repurchase and reissuance.
• Overlooking Legal and Regulatory Restrictions : Not considering legal restrictions on treasury stock transactions can result in non-compliance with corporate laws and regulations. Ensure that all transactions adhere to relevant legal requirements.
• Improper Presentation in Financial Statements : Misclassifying treasury stock or failing to separate it from other equity accounts can result in misleading financial statements. Proper presentation is key to transparency.

Best Practices

To ensure accurate and compliant accounting for treasury stock, consider the following best practices:

• Clear Understanding of GAAP Standards : Familiarize yourself with GAAP guidelines for treasury stock transactions. Understanding the differences between the cost method and par value method is essential for accurate accounting.
• Consistent Application of Methods : Apply the chosen accounting method consistently across all treasury stock transactions. Consistency helps maintain accuracy and transparency in financial reporting.
• Detailed Record-Keeping : Maintain comprehensive records of all treasury stock transactions, including dates, number of shares, repurchase and reissuance prices, and impacts on equity accounts. This aids in accurate reporting and disclosure.
• Regular Reconciliation : Periodically reconcile the treasury stock account with other equity accounts to ensure all transactions are recorded correctly and reflect the current financial position.
• Comprehensive Disclosures : Provide detailed disclosures in the notes to the financial statements, including the nature and purpose of treasury stock transactions, the number of shares repurchased and reissued, and the impact on shareholders’ equity.
• Consultation with Legal and Regulatory Experts : Ensure compliance with legal and regulatory requirements by consulting with legal experts. Understanding any restrictions or conditions related to treasury stock transactions helps avoid legal pitfalls.
• Training and Education : Regularly train and educate the accounting team on the latest GAAP standards and best practices for treasury stock accounting. Keeping the team updated ensures accurate and compliant financial reporting.
• Use of Accounting Software : Implement accounting software that supports treasury stock transactions. Software can help automate calculations, maintain records, and ensure compliance with accounting standards.

By adhering to these best practices, companies can avoid common mistakes and ensure accurate, transparent, and compliant accounting for treasury stock transactions. This not only enhances the reliability of financial statements but also maintains investor confidence and supports strategic financial management.

Recap of Key Points

In this article, we explored the intricacies of accounting for treasury stock under GAAP, covering various aspects essential for accurate financial reporting. Here’s a recap of the key points:

• Definition of Treasury Stock : Treasury stock consists of shares that a company has repurchased from the market, which do not carry voting rights or pay dividends, and reduce the total shareholders’ equity.
• Methods of Accounting : We examined the cost method and the par value method, detailing how each method records treasury stock transactions and impacts shareholders’ equity differently.
• Journal Entries : We provided detailed examples of journal entries for the initial purchase, reissuance above and below cost, and retirement of treasury stock under both methods.
• Impact on Financial Statements : We discussed how treasury stock transactions affect shareholders’ equity, earnings per share (EPS), and their presentation in the balance sheet.
• Disclosure Requirements : We highlighted the importance of thorough disclosures in the financial statements and notes, ensuring transparency and compliance with GAAP.
• Examples and Illustrations : We offered practical examples and an illustrative case study to demonstrate the real-world application of accounting for treasury stock.
• Common Mistakes and Best Practices : We identified common errors to avoid and outlined best practices to ensure accurate and compliant accounting for treasury stock transactions.

Importance of Accurate Accounting for Treasury Stock

Accurate accounting for treasury stock is crucial for several reasons:

• Financial Integrity : Proper accounting for treasury stock ensures the accuracy and integrity of a company’s financial statements. Misclassifications or errors can lead to misleading financial information, affecting stakeholders’ decisions.
• Regulatory Compliance : Adhering to GAAP standards and regulatory requirements is essential to avoid legal issues and potential penalties. Accurate accounting helps maintain compliance and fosters trust with regulatory bodies.
• Investor Confidence : Transparency in reporting treasury stock transactions builds investor confidence. Investors rely on accurate financial information to make informed decisions, and clear reporting of equity transactions is fundamental to this trust.
• Strategic Financial Management : Understanding and accurately reporting treasury stock transactions enable better strategic financial management. Companies can use treasury stock transactions to manage capital structure, return value to shareholders, and signal market confidence.
• Impact on Key Financial Metrics : Treasury stock transactions directly affect key financial metrics such as EPS and shareholders’ equity. Accurate accounting ensures these metrics reflect the true financial health and performance of the company.

By following the guidelines and best practices outlined in this article, companies can achieve accurate and compliant accounting for treasury stock, enhancing financial reporting quality and supporting strategic financial goals.

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Treasury Stock

By Majid Kazi |

November 23, 2020

What is Treasury Stock?

Treasury stock is an account within a company’s financial statements to account for any repurchases of its own stock that the company has made. A company may buy back their own shares from the market if they see them as undervalued or to return excess capital to shareholders as an alternative to paying a dividend.

The account is found in the balance sheet as well as the statement of changes in shareholders’ equity.

Key Learning Points

• Treasury stock is an account used for representing the number of shares repurchased from shareholders
• Additionally, treasury stock also includes shares surrendered to the company in connection with employee stock options and restricted stock units (RSUs)
• Treasury stock is a contra equity account or an account within the shareholder’s equity account with a negative balance
• Treasury stock does not have voting rights, is not considered for dividends or in the calculation of earnings per share (EPS)
• There are two methods of accounting for treasury stock: 1) cost method, and 2) par method. The cost method is more commonly used

Difference Between Treasury Stock and Other Equity Accounts

Shareholders are owners of a company and reap the financial rewards but also bear the risk. Their rewards stem from an increase in the share price (capital appreciation) and profits distributed in the form of dividends. The vast majority of shareholders are common shareholders. Here are the key differences between treasury stock and common stock.

Methods of Accounting for Treasury Stock

When companies issue stocks, these are recorded in the equity section of the balance sheet, within the common stock and additional paid-in capital reserves. Treasury stock is a contra equity account, which means it will have a negative balance. If a company carries out a share buyback, there are two ways of accounting for treasury stock:

• Cost Method
• Par value method

The key difference between the two methods is the treatment of gains or losses arising from the share repurchase.

Finding Treasury Stock in the Financial Statements

You can find information on treasury stock in the consolidated balance sheet of a company. Treasury stock can be found in the Liabilities and Equity section as part of shareowners’ equity.

Here is an excerpt from the balance sheet of The Coca Cola Company.

Here, treasury stock has a negative balance and reduces total equity. The company uses the “at cost” method of accounting for treasury stock.

Additionally, you can find details of treasury stock in the consolidated statements of shareholders’ equity. The statement gives investors more transparency about the changes in equity accounts and reports the business activities that contribute to the movement in the value of shareholders’ equity.

The section has details on treasury stock at the beginning and at the end of the year. It also includes the details of any stock issuance during the year.

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How Is Treasury Stock Shown on the Balance Sheet?

Under Securities and Exchange Commission regulations, privately held companies can sell shares of stock without going public by making a private placement. Because the stock is not traded publicly, the company must derive the per share value by other means. Accountants use several methods to determine a value that is acceptable to the stock buyer and seller. The stock may need to be revalued if the company decides to buy its stock shares back.

Treasury Stock

Authorized shares are the stock shares a company can legally sell. When stock shares sell, they go from being authorized to being issued. The money collected from the stock sale is shown in the asset section of the balance sheet as a debit to cash and in the stockholders' equity section as a credit to common stock. In the stock buyback, the repurchased shares are no longer classified as issued shares but as treasury stock.

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Treasury Stock Account Classification

The stockholders' equity section has two main headings: paid-in capital and retained earnings. Treasury stock is listed under its own heading in the stockholders' equity section below the retained earnings heading. If the company's financial status has changed significantly from when the stock was first sold, the stock may need to be revalued to accurately reflect the current value. To record the repurchase, the treasury stock account is debited and the cash account in the asset section is credited.

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If a company decides to reissue treasury stock for a new private placement, the treasury stock basis is the share price as of the repurchase date. If the treasury stock is revalued and sold above the basis, the balance sheet shows a debit to cash for all the money received. In the stockholders' equity section, the treasury stock account is credited with the total basis price, and the additional paid-in capital account is credited with the gain.

Treasury Stock Reissue Loss

If the treasury stock revalue amount is less than the basis, the money received is debited to the cash account, and the loss is debited to the additional paid-in capital account. The cash amount received and the loss amount are added together and credited to the treasury stock account.

Treasury Stock Retirement

If a company decides to retire its treasury stock, it uses the share price as of the repurchase date as the basis. If the retirement stock revaluation price is higher than the basis, the balance sheet shows the transaction as a debit to common stock at the basis price and a debit to paid-in capital for the amount over the basis. Treasury stock is credited for the full amount.

Treasury Stock Retirement Loss

If the retirement stock revaluation price is lower than the basis, the transaction is shown as a debit to common stock at the basis price. A credit is made to paid-in capital for the amount under the basis and a credit is made to treasury stock at the basis price.

• Securities and Exchange Commission: Can My Company Legally Offer and Sell Securities Without Registering With the SEC?
• Financial Web: Authorized Stock vs. Issued Stock
• Accounting Coach: Treasury Stock
• Principles of Accounting: Treasury Stock Reissued Above Cost
• Principles of Accounting: Treasury Stock Reissued Below Cost
• Accounting Simplified: Treasury Stock Retirement

Based in St. Petersburg, Fla., Karen Rogers covers the financial markets for several online publications. She received a bachelor's degree in business administration from the University of South Florida.