What Are the Journal Entries for Treasury Stock?

Treasury stock refers to a company’s own shares that it has repurchased from the open market. These shares are no longer outstanding and do not have voting rights or receive dividends. Companies buy back shares to increase earnings per share, provide stock for employee compensation plans, or signal that management believes the stock is undervalued. These repurchased shares can be reissued or permanently retired, and the process of buying, reissuing, and retiring them involves distinct journal entries.

Accounting for the Purchase of Treasury Stock

When a company repurchases its own shares, the most common accounting treatment is the cost method under U.S. Generally Accepted Accounting Principles (GAAP). The transaction is recorded based on the total price paid, with a journal entry that debits the “Treasury Stock” account and credits the “Cash” account.

For example, if a company buys back 1,000 shares of its stock at a market price of $10 per share, the total cost is $10,000. The journal entry to record this purchase would be a debit of $10,000 to Treasury Stock and a credit of $10,000 to Cash.

An alternative, the par value method, is used less frequently because it is more complex. The cost method is preferred for its simplicity in tracking the share buyback at its acquisition cost.

Accounting for the Reissuance of Treasury Stock

After acquiring treasury stock, a company may choose to sell these shares back to the public. The accounting for this reissuance depends on whether the selling price is equal to, greater than, or less than the original purchase cost. These transactions are treated as capital transactions, meaning any “gain” or “loss” is recorded within the stockholders’ equity section and never on the income statement.

Reissuance at Cost

When treasury shares are reissued at the same price they were purchased, the journal entry reverses the initial purchase for that portion of shares. If a company reissues 500 shares bought at $10 each for the same price, it would debit Cash for $5,000 and credit Treasury Stock for $5,000. This entry increases cash and reduces the treasury stock balance.

Reissuance Above Cost

If shares are reissued for more than their cost, the excess is recorded in a separate equity account. For instance, if 500 treasury shares purchased at $10 each are reissued at $12 per share, the company receives $6,000. The entry is a debit to Cash for $6,000, a credit to Treasury Stock for the $5,000 cost, and a credit to “Additional Paid-in Capital—Treasury Stock” for the $1,000 difference. This amount is an increase in capital, not a gain on sale.

Reissuance Below Cost

When treasury shares are reissued for less than their cost, the shortfall is handled by reducing other equity accounts. Suppose 500 shares purchased at $10 were reissued at $7 per share, for a total of $3,500. The $1,500 difference must be absorbed within equity. The accounting treatment requires first debiting any existing balance in the “Additional Paid-in Capital—Treasury Stock” account. If that balance is insufficient, the remaining difference is debited to “Retained Earnings.”

For example, if the Additional Paid-in Capital—Treasury Stock account had a balance of $1,000, the entry would be a debit to Cash for $3,500, a debit to Additional Paid-in Capital—Treasury Stock for $1,000, a debit to Retained Earnings for the remaining $500, and a credit to Treasury Stock for $5,000.

Accounting for the Retirement of Treasury Stock

Instead of reissuing shares, a company may permanently retire them, which formally cancels the stock. Retired shares cannot be reissued. The journal entry to retire shares reverses the accounts credited when the stock was originally issued. The entry involves debiting “Common Stock” for the par value and “Additional Paid-in Capital—Common Stock” for the amount originally paid above par. The “Treasury Stock” account is credited for the cost at which the shares were repurchased.

For example, assume shares with a $1 par value were originally issued for $8 and later repurchased as treasury stock for $10. To retire one share, the entry would be a debit to Common Stock for $1, a debit to Additional Paid-in Capital—Common Stock for $7, and a credit to Treasury Stock for $10. Because the debits ($8) do not equal the credit ($10), the $2 difference is debited to Retained Earnings to balance the entry. This debit to Retained Earnings reflects that the company paid more to retire the shares than it originally received.

Presentation on the Financial Statements

Treasury Stock is presented on the balance sheet as a contra-equity account, meaning it is a deduction from total stockholders’ equity. It has a natural debit balance, unlike other equity accounts, so its value is subtracted from the sum of common stock, additional paid-in capital, and retained earnings.

A simplified stockholders’ equity section illustrates this. The section might show Common Stock of $100,000, Additional Paid-in Capital of $400,000, and Retained Earnings of $500,000, for a total of $1,000,000. If the company holds treasury stock with a cost of $50,000, the presentation would show the individual equity accounts summing to $1,000,000, followed by a line item “Less: Treasury Stock” for ($50,000), resulting in a final “Total Stockholders’ Equity” of $950,000.