Treasury stock is shares of corporate stock that a company previously sold to investors and has since bought back. It may seem strange for a company to do this. After all, isn’t the point in selling stock to raise capital?
A corporation may opt to remove shares from the open marketplace for many reasons. For example, a corporation may buy back shares of its own stock to prevent a hostile takeover. Fewer shares trading in the open market reduces the chance of another company purchasing a controlling interest in the corporation.
You record treasury stock on the balance sheet as a contra stockholders’ equity account. Contra accounts carry a balance opposite to the normal account balance. Equity accounts normally have a credit balance, so a contra equity account weighs in with a debit balance.
Your intermediate accounting textbook covers three different treasury stock transactions: purchasing, selling, and retiring. All three are pretty easy to journalize after you get the hang of it. Time to get going hanging this treasury stock wallpaper!
Purchase: The journal entry is to debit treasury stock and credit cash for the purchase price. For example, if a company buys back 10,000 shares at $5 per share, the amount debited and credited is $50,000 (10,000 x $5).
Sale at more than cost: If the company reissues all 10,000 shares of treasury stock at a price higher than what it paid to purchase it (say it sold the purchased stock at $6 per share), the journal entry is to debit cash for $60,000 (10,000 x $6) and credit treasury stock for $50,000 and paid-in capital from treasury stock for $10,000 ($60,000 – $50,000).
Sale at less than cost: If the company reissues all 10,000 shares of treasury stock for $4 per share, the journal entry is to debit cash for $40,000 (10,000 x $4), debit paid-in capital from treasury stock for $10,000, and credit treasury stock for $50,000.
Retiring: If the company retires treasury stock, the journal entry is to debit the paid-in capital account that relates to the retired treasury stock and credit treasury stock.
Per generally accepted accounting principles, recording any sort of gain or loss on treasury stock transactions isn’t appropriate.
