Perhaps the most compelling reason a company buys back shares of its outstanding stock from the open market is to improve financial statements. A share buyback, also known as a share repurchase, increases the return on assets, along with increasing stockholder equity. Once repurchased, the stock is no longer able to be traded and is held as treasury stock or retired outright. A company must accurately record the share buyback transaction to ensure financial statements are accurate.
Gather information about the number of shares the company bought back and the amount that was paid for each share to get the total amount paid. For example, if a company bought back 50,000 shares at $10 a share, the total price paid for the repurchase is $500,000. The stock’s par value and the market price per share do not affect the accounting entries.Step 2
Prepare the journal entry to record the transaction. The Treasury Stock account will be debited and the cash account credited for the full repurchase amount. Using the above example, debit the Treasury Stock account for $500,000 and credit the cash account by $500,000. If the company used a different asset for the repurchase, credit that account instead of cash. For example, if the company used machinery as the asset, debit Treasury Stock $500,000 and credit machinery $500,000.Step 3
Disclose the treasury stock in the stockholder’s equity section of the balance sheet. Although the common-stock value is now overstated as a result of the buyback, that account is not changed. Instead, go to the Treasury Stock line and record the $500,000 as a debit to reduce the common stock value overstatement. Include a brief explanation of the transaction beneath the Treasury Stock entry. Create a Treasury Stock line if the balance sheet does not already have one and disclose the transaction there.
Items you will need
- Manual accounting system or accounting software program
- Companies use their excess, or surplus, funds to repurchase its stock. The buyback decreases the number of shares on the market, which increases earnings per share and price-to-earnings ratio.
- Treasury Stock is a contra-equity, or negative equity account. Treasury stock is not held as an asset because a corporation cannot be its own shareholder.
- A company can buy back its shares to temporarily halt the stock price from dropping, or to increase the share price. If you're a potential investor, investigate the reasons for the buyback before investing in the stock.
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