Definition of Treasury Stock
Treasury stock is usually a corporation’s previously issued shares of common stock that have been purchased from the stockholders, but the corporation has not retired the shares. The number of shares of treasury stock (or treasury shares) is the difference between the number of shares issued and the number of shares outstanding. Since the treasury shares result in fewer shares outstanding, there may be a slight increase in the corporation’s earnings per share.
Treasury Stock is also the title of a general ledger account that will have a debit balance equal to the cost of the repurchased shares being held by the corporation. The corporation’s cost of treasury stock reduces the corporation’s cash and the total amount of stockholders’ equity.
The shares of treasury stock will not receive dividends, will not have voting rights, and cannot result in an income statement gain or loss. The shares of treasury stock can be sold, retired, or could continue to be held as treasury stock.
Example of Treasury Stock
A corporation has excess cash and does not see any attractive investments. As a result, it decides to purchase 10,000 shares of its 300,000 shares of common stock that is held by its stockholders. The market value of the 10,000 shares is $40 per share. The corporation’s entry to record the purchase of these shares of stock is:
- Debit Treasury Stock for $400,000
- Credit Cash for $400,000
