Treasury Stock (Treasury Shares)
Candlefocus EditorAlthough treasury stock is technically owned by the company, it cannot be traded or used to vote in any shareholder meetings. Instead, companies repurchase the stock to have more control over the stock price and market capitalization by limiting the amount of shares available in the market. This can help the company maintain its stock price or increase it over time.
There are two primary methods for accounting for these transactions in the company’s statements: the cost method and the par value method. With the cost method, companies record the repurchased shares at the actual cost. Conversely, with the par value method, companies record the shares at their par value.
The cost method has the benefit of providing the company with more control over the number of shares available to the public, and is the most commonly-used method for recording treasury stock. On the other hand, with the par value method, the company records the purchase of the treasury stock at its par value, which is based on the face value of the security. This has the effect of decreasing the company’s contribution surplus and paid-in capital.
The repurchased treasury stock is held as a contra equity account, and as such it reduces total shareholders’ equity on a company’s balance sheet. Any earnings on the treasury stock is also listed under the contra equity account in the shareholders’ equity portion of the balance sheet.
Companies are able to use treasury stock for a number of purposes, including the issuance of employee stock options, the sale of new shares, and the retirement of existing shares. Companies may also register the shares with the SEC for public sale at some point in the future.
By repurchasing their stocks, companies are also able to influence their market capitalization. Because the repurchased shares are taken out of the public market, the number of shares available for trading is decreased, and this can cause the market capitalization of a company to increase.
In summary, treasury stock is formerly-outstanding stock that has been repurchased and is held by the issuing company. It reduces total shareholders’ equity on a company’s balance sheet, and there are two main methods for recording treasury stock: the cost method and the par value method. Companies use treasury stock for a variety of purposes, including stock option issuance, the sale of new shares, and the retirement of existing shares. Additionally, companies can use treasury stock to manipulate their market capitalization and stock price.