Companies issue shares to their shareholders and gets finance in exchange. This finance becomes a part of a company’s equity. Through this equity, companies can run their operations and fund various operations. Usually, shares do not stay with the same holder and may change hands several times. These shares remain in the financial statements and systems as outstanding shares.
When companies issue shares, they get finance in exchange. As mentioned, shareholders may transfer these shares to other investors through the market. However, the underlying company does not receive any funds for the subsequent transactions. In most cases, companies keep the initial finance forever and count those issued shares as outstanding.
Sometimes, however, companies may also repurchase their issued shares. These instances may occur when the company’s management believes it would be financially beneficial to do so. However, this process may carry various conditions. This concept of repurchasing shares falls under treasury stock. Subsequently, companies may issue these shares to shareholders. The accounting for the issuance of treasury stock may be complex.
What is Treasury Stock?
Treasury stock refers to any shares in a company’s financial statements that it has repurchased from shareholders. Usually, these shares get issued at a previous date. After some time, the company may choose to reacquire them from stockholders. Therefore, treasury stock is the repurchase of previously outstanding shares by an issuing company.
Treasury stock allows companies to repurchase their shares from shareholders. Through this process, they can reduce the number of shares in circulation in the market. In most cases, companies reacquire these shares to retire them. However, they may also choose to reissue them to the market at a later date. Nonetheless, this process results in the total number of outstanding shares in the open market decreasing.
Treasury stock forms a separate account in a company’s financial statements. More importantly, they do not count as outstanding shares. Therefore, they can decrease the earnings per share (EPS) since these shares do not represent stock in circulation. Similarly, these shares do not form a part of the dividend per share calculation. Therefore, existing shareholders can receive a higher distribution of profits as a result.
Other names used for treasury stock are treasury shares or reacquired stock. These are stocks that companies repurchase from the open market. Usually, the process for reacquiring these shares may differ from one company to another. This process often involves letting shareholders decide whether to sell their shares back to the issuing company. The company then holds those shares for its disposition.
Overall, treasury stock refers to any shares that companies reacquire from the open market. The issuing company decides what to do with that stock. In most cases, companies hold those shares until they need to issue them to the public again. However, some companies may also retire the shares. This way, those shares remain out of market circulation permanently. These shares appear under shareholders’ equity in the balance sheet.
What is the Accounting for Issuance of Treasury Stock?
When a company repurchases its shares, it has the option to register them under two methods. The first involves ignoring the par value of the shares that the company reacquires. Instead, it requires companies to record the treasury stock for the repurchase amount. Under this method, the company will not change the balances in any of the equity accounts.
However, when the company issues the treasury stock back to shareholders, they will receive compensation. This compensation may either be higher or lower than the cost paid for those treasury shares. The accounting for the issuance of treasury stock will differ based on how much payment the company receives. When recording these transactions under the cost method, the company will also involve the equity accounts.
The second method for accounting for treasury stock involves the par value method. Under this method, the company will compare the price paid for the treasury stock with the par value of those shares. It must only record the par value in the treasury stock account. Any excessive payment made for those shares will become a part of the share premium. Usually, this transaction will reduce the balance in that account.
When reissuing the treasury stock under the par value method, the accounting will be similar. The company will use the same accounting treatment when it issues shares. Therefore, the process will involve a similar accounting process as for the issuance of common stock. It does not differ based on whether the company receives more or less cash than what it paid shareholders.
Overall, the accounting for issuance of treasury stock may differ based on how a company records them initially. Under the cash method, the company must consider the compensation received for distribution. However, with the par value method, the accounting will be similar to the issuance of common stock. In some cases, companies may also retire the stock. However, that does not concern the accounting for the issuance of treasury stock.
What are the journal entries for the issuance of Treasury Stock?
The journal entries for the issuance of treasury stock will differ based on the method used to record them initially. Therefore, the treatment will be as follows.
Cost method
When a company reacquires stocks, it will record it as follows under the cost method.
| Date | Particulars | Dr | Cr |
| Treasury stock | XXXX | ||
| Cash or Bank | XXXX |
When it issues them to the shareholders, the compensation may be higher or lower than the cost. If the cost of treasury stock exceeds the payment received for issuance, the journal entries will be as follows.
| Date | Particulars | Dr | Cr |
| Cash or Bank | XXXX | ||
| Share premium (Balance available) | XXXX | ||
| Retained earnings (Exceeding amount) | XXXX | ||
| Treasury stock | XXXX |
However, if the compensation received exceeds the cost, the accounting entries will be as follows.
| Date | Particulars | Dr | Cr |
| Cash or Bank | XXXX | ||
| Share premium (Exceeding balance) | XXXX | ||
| Treasury stock (Cost) | XXXX |
Par value method
Under the par value method, the repurchase of treasury stock will have the following entries.
| Date | Particulars | Dr | Cr |
| Treasury stock (Par value) | XXXX | ||
| Share premium (Exceeding amount) | XXXX | ||
| Cash or Bank | XXXX |
Once the company issues those shares to shareholders, the accounting entries will be as follows.
| Date | Particulars | Dr | Cr |
| Cash or Bank | XXXX | ||
| Share premium (Exceeding amount) | XXXX | ||
| Share capital (Par value) | XXXX |
Example
A company, ABC Co., repurchases 1,000 of its shares from the market for $150 per share. Similarly, the par value of those shares in the company’s accounts is $100 per share. For this process, ABC Co. uses the par value method of accounting for treasury stock. Therefore, the company records this transaction as follows.
| Date | Particulars | Dr | Cr |
| Treasury stock | $100,000 | ||
| Share premium | $50,000 | ||
| Cash or Bank | $150,000 |
Subsequently, ABC Co. issues this treasury stock. For these shares, the company charges shareholders $120 per share. As mentioned above, the par value for these shares is $100 per share. Therefore, the journal entries for the issuance of treasury stock for ABC Co. will be as follows.
| Date | Particulars | Dr | Cr |
| Cash or Bank | $120,000 | ||
| Share premium (Exceeding amount) | $20,000 | ||
| Share capital (Par value) | $100,000 |
Conclusion
Treasury stock refers to any shares repurchased from shareholders by a company. The accounting for issuance of treasury stock may differ based on the method used to record them.
Under accounting standards, companies can account for them using the cost or par value method. Once companies record the initial transaction, they can deal with the issuance of treasury stock accordingly.
