Treasury stock is the shares that a company buys back from its shareholders on the open market. Since a company cannot be its own shareholder, the possession of such shares is not shown as an asset on the balance sheet. Instead, the repurchased shares are held in treasury for future re-issuance and reported as a contra account -- an account that reduces the value of another account -- to other shareholder-equity accounts on the balance sheet. Alternatively, repurchased shares can be retired at the time of repurchase, and thus no treasury stock is reported in the balance sheet.
When a company repurchases its stock and holds the shares in treasury for future re-issuance, it increases the value of the treasury-stock account by the amount of cash spent in the buyback. Treasury stock is a negative equity account and listed in the balance sheet after the account for retained earnings. The increase in the treasury-stock account from share repurchase is subtracted from total shareholder equity. While held in treasury, repurchased shares are still considered issued but not outstanding. In other words, the number of shares that a company is authorized to issue remains the same.
Stock Re-issuance at Gain
When a company re-issues its treasury stock to investors, the selling price is compared to the earlier repurchase cost of the treasury stock for balance sheet recording. If the price is higher than the cost, the extra cash received from the price difference is recorded as an addition to a shareholder-equity account called additional paid in capital (APIC). At the same time, the treasury-stock account is reduced by the amount equal to the cost of the treasury shares re-issued. Since treasury stock is a contra account to shareholder equity, the decrease in treasury stock increases total shareholder equity, plus any addition to APIC.
Stock Re-issuance at Loss
A company may sometimes re-issue its treasury stock at a loss. The loss of cash from the price difference is recorded as a subtraction first from the APIC account, and when exhausted, the remaining amount is further deducted from the account of retained earnings. In the meantime,the treasury-stock account is reduced by the amount equal to the cost of treasury shares re-issued. The decrease in treasury stock increases total shareholder equity, minus subtractions from APIC and retained earnings if any.
Repurchased shares are held in treasury only when a company intends to re-issue them. Repurchasing shares for stock retirement immediately after the buyback does not create any treasury stock in the balance sheet. However, stock retirement reduces total shareholder equity first by the amount of the stock's original issuing cost. Then, depending on the difference between the stock's repurchase price and its original issuing price, additions or subtractions are made to or from APIC, and from retained earnings when necessary. If the repurchase price is less than the original issuing price, the difference is added to APIC. If the repurchase price is more than the original issuing price, the difference is first subtracted from APIC. If there is still a balance after APIC has reached zero, retained earnings are further deducted.
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