Treasury stock, also known as treasury shares or reacquired stock, refers to shares that a company has repurchased from the open market or shareholders. These shares are no longer considered outstanding and do not have voting rights or receive dividends. Understanding treasury stock accounting is crucial for maintaining accurate financial records and complying with accounting standards.
Accounting for Treasury Stock
1. Cost Method
The Cost Method is the most commonly used approach. Under this method, treasury stock is recorded at its repurchase cost, without considering the stock’s original issuance price.
Example 1: Company Repurchases Treasury Stock
A company repurchases 1,000 shares at $50 per share:
Journal Entry:
Treasury Stock (Debit) $50,000
Cash (Credit) $50,000
Example 2: Company Reissues Treasury Stock at a Gain
If the company later reissues the shares at $60 per share:
Journal Entry:
Cash (Debit) $60,000
Treasury Stock (Credit) $50,000
Paid-in Capital (Credit) $10,000
(The extra $10,000 goes into the Paid-in Capital—Treasury Stock account.)
Example 3: Company Reissues Treasury Stock at a Loss
If the shares are reissued at $40 per share, the loss is first deducted from Paid-in Capital—Treasury Stock before impacting Retained Earnings:
Journal Entry:
Cash (Debit) $40,000
Paid-in Capital (Debit) $10,000
Treasury Stock (Credit) $50,000
(If there is not enough balance in Paid-in Capital, the remaining loss is deducted from Retained Earnings.)
2. Par Value Method
The Par Value Method records treasury stock at its par value rather than its repurchase cost. This method impacts multiple equity accounts.
Example 4: Company Repurchases Treasury Stock Using the Par Value Method
A company with $10 par value stock repurchases 1,000 shares at $50 each:
Journal Entry:
Treasury Stock (at Par) (Debit) $10,000
Paid-in Capital (Excess) (Debit) $40,000
Cash (Credit) $50,000
Example 5: Company Reissues Treasury Stock Above Cost
If the company reissues the shares at $55 per share:
Journal Entry:
Cash (Debit) $55,000
Treasury Stock (at Par) (Credit) $10,000
Paid-in Capital (Excess) (Credit) $45,000
Example 6: Company Reissues Treasury Stock Below Cost
If the shares are reissued at $45 per share, the loss is first deducted from Paid-in Capital—Treasury Stock before impacting Retained Earnings:
Journal Entry:
Cash (Debit) $45,000
Paid-in Capital (Debit) $5,000
Treasury Stock (at Par) (Credit) $10,000
(Any remaining loss after Paid-in Capital is deducted from Retained Earnings.)
Treasury stock transactions play an essential role in financial management. Companies can use the Cost Method or Par Value Method to record treasury stock transactions while maintaining compliance with financial regulations. By properly accounting for treasury stock, businesses provide greater transparency to investors and improve financial reporting accuracy.
