What is treasury stock?

Definition

Treasury stock is the company's own shares that it has bought back and not yet retired. On the books, this is a contra-Equity account on the Balance Sheet, shown as a reduction of the equity section.

The shares still exist. They are just held by the company, so they are not outstanding and they do not vote or take dividends.

Cash-basis and accrual books both record the buyback the same way. Paying for the shares is a financing event, not an expense on the Income Statement.

This line is ownership pulled back in, not an asset the shop can sell like frames. An optometry shop that buys out a departing shareholder is reducing equity, not stocking inventory.

Where it shows up

Balance Sheet: Located as a reduction of the equity section.

P&L: Related to ownership, not to a period's profit.

Cash flow: Increases in this account, reported cash from financing activities decreases.

See also: Common Stock · Equity · Cash Flow From Financing

When you look at your Balance Sheet, this line sits in the equity section as a subtraction from common stock, additional paid-in capital, and retained earnings. The total equity is smaller by the amount paid, or by the amount still carried for those shares.

When the balance is high, the shop has bought back more of its own stock. When it is zero, no issued shares are sitting in the treasury.

The profit and loss statement does not list this account. A buyback is not a loss, and a later reissue is not revenue.

The Statement of Changes in Equity shows the repurchase as a reduction of equity. That ending total has to match the Balance Sheet.

On the Statement of Cash Flows, cash paid to buy the shares back is a financing outflow. Cash received if those shares are reissued is a financing inflow.

How it works

The balance comes in when the company writes a check for its own shares. Cash is credited, and this contra account is debited for the cost.

Common stock is left alone until the shares are retired. The par account still shows the original issue; this line is the hold-back.

If the shares are later reissued, cash comes back in and this line is reduced. Any difference versus the original buyback cost is usually adjusted through additional paid-in capital, not through the P&L.

If the shares are retired, common stock and additional paid-in capital are reduced, and this line is cleared. Retirement is a legal step, not the purchase itself.

Dividends are not paid on shares in the treasury. Outstanding shares are issued shares minus these.

This line is not an investment asset. The company cannot own itself the way it owns a bank account or exam chairs.

Stay with this account when you read a buyback. The cash that left is the financing story; this line is the equity reduction that matches it.

A sole proprietor does not use this account. Buybacks are a corporation story, or the story of a similar share entity.

Example

An optometry shop is a small corporation with $5,000 of common stock and $20,000 of additional paid-in capital. A founding optometrist leaves, and the shop buys that person's 200 shares back for $8,000 cash.

The buyback is recorded:

Debit: Treasury stock $8,000

Credit: Cash $8,000

Cash falls by $8,000, and equity falls by $8,000 because this contra account increased. Common stock still prints $5,000; the $8,000 is the reduction sitting under it.

The Balance Sheet equity section now nets $8,000 lower. If the bookkeeper expensed the $8,000, the Income Statement is wrong and equity is not.

Those 200 shares no longer take a dividend. If the shop later reissues them to a new partner for $9,000, cash rises and this line is cleared, with the extra $1,000 going to additional paid-in capital.

Common mix-ups

Treasury stock is not an asset. The shop does not own a second investment; it has reduced its own equity.

This line is not a dividend. A dividend pays profit to outstanding shareholders; a buyback pays cash to repurchase shares.

This line is not common stock run backwards. Common stock stays at original par until retirement; this account holds the cost of the shares brought back.

Related terms

• Common Stock: The par-value equity account for shares issued to owners.
• Equity: The owners' residual claim on the business after liabilities are subtracted from assets.
• Additional Paid-In Capital: Amounts investors paid above par value for their shares.
• Cash Flow From Financing: Cash from borrowing, repayment, owner contributions, and distributions.
• Statement Of Changes In Equity: A statement reconciling beginning and ending owner equity for the period.
• Book Value: The equity value carried on the balance sheet rather than a market value.
• Balance Sheet: A statement showing what a business owns, what it owes, and what is left for owners at a single point in time.
• Distributions: Payments of profit out to owners or shareholders.