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Treasury Stock: Definition, Accounting Method & Formula

Instructor: Anthony Aparicio

Tony taught Business and Aeronautics courses for eight years; he holds a Master's degree in Management and is completing a PhD in Organizational Psychology

Treasury stock is a very special category of stock within the business world. Read this informative lesson to find out exactly what treasury stock is and how business managers and executives use it within their companies.

Treasury Stock

Many of you are probably familiar with the terms 'common' and 'preferred stock', but have you ever heard of treasury stock? When business people, including accountants, talk about treasury stock, they are referring to stock that a company holds or buys back from investors and keeps for a designated period of time. It is called treasury stock because when an organization buys back their own shares, they are kept in the company's treasury.

Why Hold Shares in Treasury?

Now, you may be asking yourself why a company would buy back its own shares of stock, especially since treasury stocks do not pay dividends or provide stockholders with voting rights. When companies make a profit, many times they will share a portion of those profits with shareholders through the use of dividends.

  • Prevent Hostile Takeovers: If a company purchases back many of its own shares, it may be able to counter an attempt by another company to conduct a hostile takeover. A hostile takeover occurs when a firm tries to purchase another company by force, or purchasing shares of stock on the open market, when they are not able to do so through formal negotiations.
  • Prepare for the Future: Some corporations decide to hold their shares in their treasury from the very beginning. If you look at the financial information of a company in relation to its stock, you will often see a difference between the number of shares it is authorized to issue and the amount of outstanding shares that have been issued. Authorized shares refer to those a corporation has permission to issue. While issuing the stock can bring in a lot of money for company, it will often retain some shares just in case it needs additional funds later on. Outstanding shares refer to the shares of stock that are actually issued and owned by all investors, including individuals and other companies. Finance professionals use the number of outstanding shares to figure out things such as the stock's earnings per share (EPS); treasury stocks do not count towards any outstanding shares.
  • Issue Shares to Employees: Corporations may also decide to issue shares to employees. Employees who are also part owners of a company are more likely to work towards the firm's best interests because they can receive a financial gain when the company does well.

Accounting Method

The cost method of accounting for treasury stock is the most common and straightforward method. When a company repurchases its own stock, the purchase price, including any brokerage or other fees, are recorded at that time. Treasury stock can be re-issued at a later date for the same price for which it was purchased, at a profit, or higher price than it was purchased, or at a loss, or lower price than it was purchased.

For example, XYZ, Inc. repurchases 20,000 shares of its own stock for $5 per share and pays a $250 brokerage fee. The treasury stock account, or contra equity account, would be debited for $100,250, and the cash account would be credited for the same amount.

Selling treasury stock for a higher price than it was purchased will increase the amount of paid-in capital, or additional value. If the 20,000 shares are resold for $10 per share, along with another $250 in brokerage fees, then the treasury stock account would be credited for the original $100,250, and the paid-in-capital account would be credited for $99,500 to record the profits generated from the sale, as well as two sets of brokerage fees. The cash account would be debited for the amount received, $199,750: 20,000 shares x $10 per share - $250 brokerage fee.

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