Treasury Stock Buyback: Accounting for Repurchased Shares

How to Account for Treasury Stock | Repurchased Shares | Reacquired Shares | Stock Buyback

Definition: What is Treasury Stock?

Treasury stock, or repurchased shares, is a contra equity account with a debit balance that reduces the total amount of equity held by a business because it represents the amount paid by a listed company to buy back its own shares from investors in the open market and hold them instead of retiring.

Treasury stock is also referred to as treasury shares, repurchased stock/shares, reacquired stock/shares, or stock/share buyback, with the terms being used interchangeably.

Explanation: Why do companies repurchase their own shares?

Stock buybacks can have a number of motivating factors. For example, the directors of a company may decide to:

Return excess cash to company shareholders rather than reinvest it into the company operations
Signal to the market that a stock is undervalued and improve valuation
Consolidate ownership of a company

A stock buyback reduces the total number of a company’s outstanding shares circulating in the open market, which means that the repurchased treasury shares are no longer included in the dividend payouts or the stockholder ratios like Earnings per Share (EPS).

Debit/Credit: Is Treasury Stock debit or credit?

Treasury stock has a debit balance because it is a contra for a standard equity account, which normally carries a credit balance.

Debit or Credit – Buyback of Repurchased Treasury Stock Shares
Account Name	Account Type	Debit	Credit
Paid-In Capital	Parent equity account	Decrease	Increase
Treasury Stock	Contra equity account	Increase	Decrease

The debit balance on a contra equity account (Treasury Stock) is used to offset the normal credit balance of a standard equity account (Paid-in Capital – Common and Preferential Shares) in order to report the net value of a company’s capital (Shareholder’s Equity) in its financial statements.

Another example of a contra equity account is an Owner’s Drawing account that records the withdrawals made by the owners of businesses which are set up as a sole proprietorship or partnership.

Journal Entry: What is the journal entry for Treasury Stock?

At the time of a stock buyback when treasury shares are repurchased, a company will debit the Treasury Stock contra equity account and credit the Cash in Bank account.

Journal Entry – Buyback of Repurchased Treasury Stock Shares
Account Name	Account Type	Debit	Credit
Treasury Stock	Contra equity account	$$$
Cash in Bank	Current asset		$$$

Balance Sheet: Where is Treasury Stock in the financials?

Treasury Stock is reported on a balance sheet, as a deduction at the end of the Shareholder’s Equity section.

Balance Sheet - Stockholders’ Equity [Example]
Paid-in Capital (common stock, preferred stock)	$1,000,000
Retained Earnings	$500,000
(Less: Treasury Stock)	($100,000)
Stockholders’ Equity	$1,400,000

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