What Is Treasury Stock?

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 澳洲幸运5官方开奖结果体彩网:earnings per share (EPS). Treasury stock is also referred to as treasury shares o🌺r reacquired stock.

Understanding Treasury Stock

Treasury stock is a 澳洲幸运5官方开奖结果体彩网:contra equity account recorded in the shareholders' equity section of the 澳洲幸运5官方开奖结果体彩网:balance sheet. Because treasury stock represents the number of shares 澳洲幸运5官方开奖结果体彩网: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 澳洲幸ꦯ运5官方开奖结果体彩网:Securities and Excꦇhange Commission (SEC) governs buybacks.

Treasury stock can be retired or 澳洲幸运5官方开奖结果体彩网:held for resale in the open market. 澳洲幸运5官方开奖结果体彩网: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,ꦜ employee compensation, or capital raising.

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 澳洲幸运5官方开奖结果体彩网:par value of the shares, while the APIC account shows the excess valuꦅe received over the par value.

Due to 澳洲幸运5官方开奖结果体彩网:double-entry bookkeeping, the offset of this journal entry is a debit to increase cash (or other as💙set) 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, bu♛t sell and be repurchased for much more.

When shares are repurchased, the treasury stock account is debited to decrease total 澳洲幸运5官方开奖结果体彩网: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 澳洲幸运5官方开奖结果体彩网: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 澳洲幸运5官方开奖结果体彩网: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.

Purpose of Treasury Stock

Why doဣ 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 澳洲幸运5官方开奖结果体彩网: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 澳洲幸运5官方开奖结果体彩网: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 itsꦉ 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 $𒉰50,000.

Under the par value method, treasury stock would be debited for $1,000 (1,000 shares x $1 par valueꦇ), 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 b💦rings෴ the total shareholders' equity down to $450,000.

The Bottom Line

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.