How to record the purchase of treasury stock
Overview
Treasury stock is the stock that the company repurchases its own shares back from the market. Likewise, the company needs to record the purchase of treasury stock as a contra account to stockholders’ equity on the balance sheet.
As the treasury stock is a contra account to the stockholders’ equity, the purchase of treasury stock will reduce both total assets and total equity on the balance sheet of the company.
However, the purchase of treasury stock does not affect the legal capital (i.e. paid-in capital) of the company. This is due to the number of issued shares does not change due to the purchase of treasury stock.
Record the purchase of treasury stock
The company can record the purchase of treasury stock with the journal entry of debiting the treasury stock account and crediting the cash account.
| Account | Debit | Credit |
|---|---|---|
| Treasury stock | 000 | |
| Cash | 000 |
In this journal entry, the par value or stated value of the stock, as well as the original issued price, is not included with recording the purchase of the treasury stock. This is due to the purchase of treasury stock is recorded at cost.
The cost method is commonly used for this transaction due to its simplicity. Under the cost method, the company can simply debit the treasury stock account at the amount paid for the purchase.
The company usually records the purchase of the treasury stocks first before deciding whether to resell them or retire them later.
However, it is useful to note that when the company purchases the treasury stocks with the intention to retire them immediately, it may directly record the purchase and retirement of the stock without the need to record the debit of the treasury stock.
Such journal entry for the recording of the purchase (and retirement) of the treasury stock may look like below instead:
| Account | Debit | Credit |
|---|---|---|
| Common stock | 000 | |
| Additional paid-in capital | 000 | |
| Retained earnings | 000 | |
| Cash | 000 |
Purchase of treasury stock example
For example, the company ABC purchases 1,000 shares of its own common stock on the market at the price of $100 per share.
In this case, the company ABC can record the purchase of treasury stock for the amount of $100,000 (1,000 x 100) with the journal entry below:
| Account | Debit | Credit |
|---|---|---|
| Treasury stock | 100,000 | |
| Cash | 100,000 |
This journal entry does not affect the legal capital of the company as the treasury stock is separately presented on the balance sheet as a contra account to the stockholders’ equity and the number of issued shares of the company is still the same.