How to Record Treasury Stock Purchase in Your Accounting Records
Learn how to accurately record treasury stock purchases, choose the right accounting method, and reflect changes properly in your company's equity section.
Buying back your company’s own stock, known as a treasury stock purchase, is a financial move businesses use to return value to shareholders, adjust capital structure, or improve financial ratios. Recording these transactions accurately is necessary for reliable financial reporting and compliance with accounting standards.
This article explains how to record a treasury stock purchase in your accounting records.
Accounting Method Options
When a company repurchases its own shares, Generally Accepted Accounting Principles (GAAP) in the United States offer guidance, primarily through the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 505.1Deloitte Accounting Research Tool (DART). ASC Topic 505 – Equity This guidance permits two main accounting methods for recording treasury stock: the cost method and the par value method.
The cost method is more common due to its simplicity. Treasury stock is recorded at the price paid to reacquire the shares, including direct acquisition costs.2PwC Viewpoint. Financing Transactions – Treasury Stock Accounting Methods This total cost is reported as a deduction from stockholders’ equity on the balance sheet. This approach treats the shares as temporarily held without immediate retirement and ignores the original par value or issuance price for the initial recording. It is often used when the company might reissue the shares later.
Alternatively, companies can use the par value method, which treats repurchased shares as constructively retired.3Principles of Financial Accounting 2. Accounting for Treasury Stock This involves removing the shares from equity accounts based on their original issuance values. The common stock account is reduced by the par value, and the additional paid-in capital (APIC) account associated with the original issuance is also reduced. If the repurchase price is higher than the original issuance price (par value plus APIC), the difference may be charged against retained earnings or APIC from previous treasury stock transactions. This method is more complex and often used when management intends to permanently retire the shares. Both methods result in the same total stockholders’ equity figure, though the presentation within the equity section differs.
Relevant Financial Accounts
Repurchasing stock affects several specific accounts. The primary one is Treasury Stock, located in the stockholders’ equity section of the balance sheet. It functions as a contra equity account, carrying a debit balance that reduces total stockholders’ equity.4Penn State University Accounting 211. Treasury Stock
The Treasury Stock account tracks the cost incurred to reacquire shares. These shares, once issued and outstanding but now held by the company, lack voting rights, are ineligible for dividends, and are excluded when calculating earnings per share (EPS), as guided by ASC Topic 260.5Deloitte US. Presentation and Disclosure of Earnings per Share Treasury stock represents a contraction of equity, not an asset.
The transaction also decreases the Cash account balance, as cash is used for the purchase. Other equity accounts like Common Stock, Additional Paid-in Capital (APIC), and Retained Earnings become relevant when using the par value method or during subsequent reissuance or retirement of treasury shares. APIC reflects amounts paid above par value during original issuance, while Retained Earnings represents accumulated profits. The specific accounts affected beyond Treasury Stock and Cash depend on the accounting method chosen and the shares’ ultimate disposition.
Recording the Journal Entry
The journal entry for a treasury stock purchase depends on the chosen accounting method. Under the cost method, the entry reflects the total cash paid. If a company repurchases 1,000 shares at $50 per share, the total cost is $50,000. The journal entry is a debit to Treasury Stock for $50,000 and a credit to Cash for $50,000. This establishes the cost basis for the treasury shares.
Using the par value method requires a more detailed entry that reverses the shares’ original equity impact. Assume the 1,000 shares repurchased at $50 had a $1 par value and were originally issued at $10. The entry would debit Treasury Stock for the par value ($1,000). It would also debit APIC for the amount initially received above par ($9,000). Since the $50 repurchase price exceeds the $10 original issue price, the $40,000 difference is typically debited to Retained Earnings. Finally, Cash is credited for the total purchase price ($50,000). This removes the original par value and APIC and accounts for the excess cost through Retained Earnings.
Reporting in the Equity Section
How treasury stock is reported on the balance sheet depends on the accounting method used. The transaction affects only the balance sheet’s stockholders’ equity section, not the income statement.
Under the cost method, treasury stock appears as a separate line item, usually after retained earnings, with a debit balance.6PwC Viewpoint. Financial Statement Presentation – Treasury Stock This reduces total stockholders’ equity, signifying the cost of shares held by the company.
The par value method typically does not show a separate “Treasury Stock” line. Instead, the repurchase is reflected by directly reducing the Common Stock account (by par value) and the APIC account (by the original amount above par). Any excess cost paid over the original issuance price usually reduces Retained Earnings. This treats the shares as retired, removing their original contribution from the equity structure.
Regardless of the method, the final total stockholders’ equity is the same. GAAP requires disclosures in the financial statement footnotes, including the number of shares held, the accounting method used, and potentially the reasons for the repurchase.7Business LibreTexts. Analyze and Record Transactions for Issuance and Repurchase of Stock
State laws governing corporations can sometimes impose specific requirements on acquiring or holding treasury stock. Companies must comply with these regulations, which might influence accounting or presentation if more restrictive than GAAP, potentially limiting repurchases or requiring immediate retirement.