Treasury stock shows the difference between the stock issued by a company and the number of shares held by investors. Corporations may choose to repurchase some of their stock shares from investors for various reasons. To maintain the accuracy of the firm's balance sheet, an accountant must properly record the repurchased shares to show them as issued, even though the ownership has changed. Treasury stock is recorded in its own account on the statement of stockholders' equity.
An investor might define stockholder's equity as the amount of equity he has personally provided to a company by investing in its stock. A company defines stockholders' equity as the cumulative value of all equity investments made in the company. The stockholders' equity section, found on the bottom of a firm's balance sheet, records all events pertaining to the company's stock activity.
Treasury stock is a specific balance sheet account set up to handle stock repurchases. Publicly held companies periodically repurchase some of their stock as a way to moderate the stock's price. For example, if the company issues a large number of new stock options to its employees, it runs the risk of diluting the value of the stock for current investors if all of those employees were to exercise their options. To prevent this, the firm will buy back some of its shares.
Recording the Transaction
When a firm buys back shares of stock, its accountants must reflect the change on the financial statements. The repurchased shares are recorded in an account called "treasury stock." This account is located in the statement of stockholders' equity on the firm's balance sheet. The treasury stock account starts with a zero balance. When the company buys back stock, the accountant credits, or decreases cash, and debits, or increases the treasury stock account.
The treasury stock account has a normal negative, or debit, balance as compared to the normal credit, or positive, balance of the common stock account in stockholders' equity. The treasury stock account is known as a "contra-account" to the common stock account. This means an increase in treasury stock acts as a negative offset to the positive balance of the common stock account. All balance sheet accounts represent a snapshot of activity at one point in time. To understand changes in the treasury stock account over time, you may need to review the statement of stockholders' equity for a few consecutive time periods to observe the timing and amount of the changes.
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