What is Treasury Stock in Accounting?

What is treasury stock and how is it accounted for in a company's financial records?

Treasury stock is a company's own stock that it has reacquired. Companies buy back their own shares to reduce the number of shares available on the open market and increase control over the company. How is treasury stock accounted for in a company's financial records?

Answer:

In accounting, treasury stock is recorded by debiting the treasury stock account and crediting either the cash account if the repurchase is made with cash or the additional paid-in capital account if the repurchase is made with stock. This reduces the number of outstanding shares and increases the value of each remaining share.

Treasury stock is the stock that a company has sold and later repurchased back from shareholders. This stock is held in the company's treasury and is no longer considered outstanding shares. This type of stock does not pay dividends, have voting rights, or impact the company's earnings per share.

When a company reacquires its own shares, it can choose to either retire them or hold them in the treasury. To account for treasury stock, the company debits the treasury stock account for the cost of purchasing the shares and credits either the cash account if cash was used or the additional paid-in capital account if stock was issued in exchange for the shares.

Accounting for treasury stock is important as it impacts the company's balance sheet and financial ratios. By reducing the number of outstanding shares, the company can influence metrics such as earnings per share and return on equity. It also allows the company to invest in itself by repurchasing undervalued shares.