What is Treasury Stock (Treasury Shares)
Treasury stock is outstanding stock repurchased from stockholders by the issuing company. These shares are issued but not outstanding and are not included in the calculation of dividends or earnings per share (EPS).
BREAKING DOWN Treasury Stock (Treasury Shares)
Treasury stock is a contra account recorded in the shareholder's equity section of the balance sheet. Because it represents the number of shares repurchased from the open market, it reduces shareholder's equity by the amount paid for the stock. In addition to not issuing dividends and not being included in EPS calculations, treasury shares have no voting rights. Also, the amount of treasury stock cannot exceed the maximum proportion of total capitalization specified by a nation's regulatory body. In the United States, the Securities and Exchange Commission (SEC) laws govern buybacks.
Treasury Shares vs. Retired Shares
Treasury stock can be retired or held for resale in the open market. 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, employee compensation, or a capital raising, for example.
Treasury Shares' Effect on the Balance Sheet
When a company raises cash by issuing stock, the equity portion of the balance sheet shows a positive balance in the common stock and additional paid-in capital (APIC) accounts. The common stock account reflects the par value of the shares, while the APIC account shows the excess value received over the par value.
Treasury shares reduce shareholders' equity and are generally labeled as "treasury stock" or "equity reduction". There are two methods of accounting for treasury stock: cost method and par value method. The cost method reduces the paid-in capital account by the amount of treasury stock purchased. If the treasury stock is later resold, the paid-in capital account is either debited or credited depending on whether the stock was sold at a gain or loss. Under the par value method, common stock is debited and treasury stock is credited when shares are repurchased from shareholders. If later resold in an open market, it will follow the cost method process.
Example of Treasury Shares
A company has excess cash and believes its stock is trading 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 total sum of its equity accounts including common stock, APIC, and retained earnings is $100,000. The repurchase creates a treasury stock contra account; as a result, the $50,000 treasury stock repurchase is deducted from the $100,000 equity account balance, leaving a difference of $50,000. Correspondingly, the cash account on the asset side of balance sheet decreases by $50,000.