Treasury stock is the stock issued by the company and may later be reacquired by the company from its shareholders.
The company may retire or cancel these stocks. The reacquired stock which is not retired by the company is called “treasury stock”. Treasury stock is not an asset for the company. A company creates its assets by holding them in itself.
There are various reasons a corporation may reacquire the stocks, such as; using treasury stocks to reissue the shares to officers and employees as a bonus and stock compensation plan (a.k.a. Employees Stock Option Plan) and to reduce the number of shares and thereby increase earnings per shares (EPS).
Now, you might be wondering, what happens to these shares once they are repurchased? Well, the shares are essentially taken out of circulation or “retired.” They are no longer considered outstanding shares, meaning they don’t have voting rights or receive dividends. They become a part of the company’s treasury stock, which is listed as a separate line item on the balance sheet.
It’s worth noting that treasury stock can be reissued at a later time if the company chooses to do so. However, this is not always the case, and oftentimes the shares remain in the company’s possession indefinitely.
Accounting for Treasury Stocks
The purchase of treasury stocks is accounted for in the books of account by the cost method. Under the cost method, the company records the treasury stocks in the books of account by increasing (debit) the treasury stock by the price paid to reacquire the shares.
Treasury stock Account decreases by the same amount when the company later sell the shares. At the time of repurchase, record the entire amount of purchase in the treasury books of account.
When treasury stocks are sold, offset the sale price against the treasury stocks account, and credit any sales exceeding the repurchase the additional paid-in the capital account.
If the sale price is lesser than the repurchase cost, charge the differential amount to any additional paid-in capital remaining from prior treasury stock transactions and any residual amount of retained earnings if there is no remaining balance in additional paid-in the capital account.
For an example:-
(a) Raymond Company purchased stock 3000 shares of its $50 par value common stock $180,000 cash on July 1. It accepts to hold the shares until they are resold.
(b) Later on, the company decides to resell the shares at $70 per share
Journalise entry is as follows:-
|1 Julu||Treasury stock||180,000|
|To Cash A/c||180,000|
|(recording the purchases of 3000 shares at $60 per share)|
- B) Sell repurchased shares at $ 70 per share
|To Additional Paid-in Capital||30,000|
|To Treasury Stock||180,000|
|(Being 3000 treasury stock sold at $70 per share.)|