Understanding Treasury Stock and Journalizing Treasury Stock Transactions

Treasury stock pertains to shares of a corporation’s own stock that have been issued and subsequently repurchased from shareholders. Following repurchase, these shares are retained by the company itself rather than being retired or annulled. The accounting treatment of treasury stock involves recording it on the balance sheet as a contra-equity account, thereby diminishing the total shareholder equity of the firm.

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The Cost Method

There are two methods for recording the purchase and reissuance of treasury stock: the cost method and the par method. The majority of textbooks use the cost method, so that will be the method we use in this guide.

Purchasing Treasury Stock

When a corporation buys back their own stock, they will debit treasury stock, a contra-equity account, and credit cash for the amount spent on the treasury stock. Any par value on the stock is ignored.

Re-issuing (Selling) Treasury Stock

When reissuing shares of treasury stock, cash will be debited for the amount of cash received for the sale, and treasury stock will be credited to the cost of the treasury stock being sold. If the amount of cash received is more than the cost of the treasury stock being sold, then paid-in capital from sale of treasury stock will be credited for the excess amount. If the cash received is less than the cost of the treasury stock being sold, then paid-in capital from sale of treasury stock will be debited assuming that there is a sufficient credit balance in the account to absorb the debited amount.

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