Definition
The financial accounting term treasury stock refers to those shares of stock that have been issued by a company, and purchased, or reacquired, by that same company. Treasury stock appears in the owner's equity section of the company's balance sheet.
Explanation
Treasury stock serves to reduce the total capitalization of a company; therefore, it appears as a negative value in the owner's equity section of the balance sheet. This is sometimes referred to as a contra-equity account. After buying back stock, a company can cancel / retire those shares or hold onto them for resale at a future date.
The most common reasons for a company to purchase back its stock include:
To increase earnings per share
To meet the requirements of a merger or employee stock plan
To establish a more robust market for its common stock
To reduce the size of the business; a reduction in the total capitalization of the corporation
To reduce the exposure of a company to a takeover attempt
Unlike the common shares issued to the public, treasury stock does not have voting rights and does not receive the payment of dividends. Treasury stock can be recorded at either its par value or at cost.
Example
Company A repurchases 20,000 shares of common stock at $80 per share, or $1,600,000. Total retained earnings appearing on the company's balance sheet is $28,348,000. These line items, as they would appear in the owner's equity section of the balance sheet, would include:
| Retained Earnings | $28,348,000 |
| Less: Treasury Stock | $1,600,000 |
| Total Stockholder’s Equity | $26,748,000 |
Related Terms
balance sheet, owner's equity, dividends, market capitalization
