Treasury Stock (Treasury Shares)

Treasury stock refers to shares that a company previously issued and later repurchased. These shares remain issued but are no longer outstanding — they do not receive dividends, do not have voting rights, and are excluded from earnings-per-share (EPS) calculations. On the balance sheet, treasury stock is recorded as a contra-equity account and reduces total shareholders’ equity.

Key takeaways

• Treasury stock is repurchased, issued stock held by the issuing company.
• It is recorded as a contra equity account and reduces shareholders’ equity.
• Two common accounting methods are the cost method and the par value method.
• Repurchased shares can be held for resale, used for employee compensation or dividends, or retired permanently.

How companies repurchase shares

Companies commonly repurchase shares by:
* Tender offer — offering to buy shares from shareholders, often at a premium; or
* Open-market purchases — buying shares on the secondary market like any other investor.

Repurchases may be subject to regulatory rules (for example, overseen by the SEC in the United States).

Accounting for treasury stock

When a company issues stock, common stock (at par value) and additional paid-in capital (APIC) increase equity and cash increases assets. When shares are repurchased, the company records the transaction using double-entry bookkeeping so that shareholders’ equity decreases.

Two primary methods of accounting are:

Cost method

• Treasury stock is recorded at the cost the company paid to repurchase the shares.
• On repurchase: debit Treasury Stock (cost) and credit Cash.
• On resale: debit Cash; credit Treasury Stock for the original cost; any difference is recorded in a paid-in capital from treasury stock (debit if a loss, credit if a gain).
• This method is most commonly used and ignores par value.

Par value method

• Treasury stock is recorded at par value.
• On repurchase: debit Treasury Stock (par value) and debit APIC by the excess originally paid over par; credit Cash for the total repurchase price. Any net difference is recorded in a treasury APIC account as a debit or credit.
• This method allocates the repurchase between par value and APIC components.

Both methods reduce total shareholders’ equity by the total cash paid for the repurchase.

Example

ABC Company originally issued 5,000 shares with $1 par value at $41 per share:
* Common stock (par) = $5,000
* APIC = $200,000

ABC repurchases 1,000 shares at $50 per share (total $50,000). The repurchase reduces shareholders’ equity by $50,000 under either accounting method. Under the cost method, Treasury Stock is debited for $50,000 and Cash credited for $50,000. Under the par value method, Treasury Stock is debited for $1,000, APIC debited for $49,000, and Cash credited for $50,000.

Retired shares

Retired shares are repurchased shares that the company permanently cancels. Retired shares cannot be reissued and are removed from equity accounts; they no longer represent ownership and are not reported as treasury stock.

Why companies buy back stock

Common reasons include:
* To reissue or resell later and raise capital.
* To increase shareholder value by reducing outstanding shares (which can boost EPS and share price).
* To return ownership to remaining shareholders (by retiring shares).
* To provide stock for employee compensation plans.
* To deter hostile takeover attempts.

Where to find treasury stock

Treasury stock appears in the shareholders’ equity section of the balance sheet as a contra-equity item, reducing total equity.

Bottom line

Treasury stock represents a company’s reacquired shares and reduces outstanding shares and shareholders’ equity. Management may hold, resell, or retire these shares for strategic, financial, or capital-structure reasons.