What are treasury stock and its transactions? Why must a company perform retirement of treasury stock? What are the basics of accounting for this notion? To get all the answers, read this article.
What is a Treasury Stock?
Treasury stocks are shares of a firm’s stock that it acquires back. There are many reasons a company repurchases its stocks. One reason might be the value of the purchased stock is very little as per directors and officers. So, you upkeep the stock price, all the while using corporate funds to make the most of your verdict.
Another reason that the company repurchases public shares could be to reorganize its stature of bringing private. The company could also be wanting to delist from any list of the stock exchange. The firm could also invest the stock towards an employee stock award plan after reacquiring the stock shares.
Purpose of Treasury Stocks
Treasury stock is a reserved stock. It is kept on the sidelines to increase funds or use for investments in the future.
Business firms might utilize these treasury stocks to reimburse for investment or for acquiring a business in competition. The treasury stock shares can also be reissued to the investors to appear more challenging in its incentive compensation plans.
Why do you Sell Treasury Stocks?
There are various reasons for companies to sell treasury stocks including generating capital or keeping the prices of stocks stable. Although, after the company repurchases the stock, the treasury stock is issued but isn’t outstanding anymore. Moreover, after the retirement of treasury stock, the sum is not even termed ‘issued.
What are Treasury Stock Transactions?
A corporate stock that investors bought from the company and then the company repurchases is called treasury stock transactions. It is a peculiar thing to do. This move reduces the risks for the companies and allow them to buy a controlling interest when there is a lesser share of trade in the open market.
These types of transactions do not have any implications over the issued or authorized shares. As these shares are not held in outstanding, every transaction affects the number of outstanding shares. Companies often want to retire their stocks to lessen the issued shares; hence, they might buy their stocks just to retire it.
Basics of Accounting for Treasury Stock Transactions
For the investments to stay at its original cost, the cost method is generally implied. So in the balance sheet or the book of accounting, the record of the treasury stocks is maintained. It is debited or increased by the exact cost as before.
It is weird that a company buys back what it sold after raising its capital once. However, as discussed previously, there are advantages to this too. There are a lot of reasons for this. A company might remove its shares from the open market to avoid a takeover from another. A lesser amount of shares exchanged in the free market lessens the risk of invasion of another company in its corporation by buying a controlling interest.
You record treasury stock in the books of account as contra investors’ equity account. Contra accounts have a balance as opposed to the normal balance of the account. Equity accounts are credited so that a contra-equity balance account would be debited by nature, being contrary to the equity accounts.
There are three different types of treasury stock transactions. The first is purchasing. Then comes selling, and finally, retiring. Journalizing all three is easy as you understand the gist of it. While purchasing, you write treasury stock on the left side of the entry and cash on the right side of the purchase’s journal entry.
When selling, the company can sell it at more than the cost or less than the cost. In the end, when retiring, the journal entry is to be debited in the explanation of capital account concerning the retired treasury stock or the treasury stock credited.
The company accounts for the shares for many reasons. The entry is added in the accounting book as an equity transaction. So, the “gains and losses” are not included in the income. Globally, the cost method is accepted by accounting and finance professionals. However, the debiting and crediting might differ in various companies’ accounting books, each having its designated style. So the treasury stock is always debited. However, the cost of the cash acquired by the treasury stock is always credited.
What is the Effect of Treasury Stocks?
When the treasury stock comes in, the cash decreases and similarly does the exact figures’ total equity. This transaction happens regardless of the original issue cost of the stock. The rules of accounting do not identify losses or gains after a company issues its stock.
The losses and gains are not considered after the company acquires its stock back. No matter how peculiar it might be this is how stock investments work. Keep in mind, though; this is not from the company’s perspective of the stock investment. Instead, it is the growth and reduction of the equity of its own.
Does Treasury Stock Come in the Account of Assets?
Treasury Stock is a contra-equity entry, hence not an asset. It is reduced from the investors’ equity. An occurrence of treasury shares causes a difference to be in the midst of the number of issued shares and the outstanding shares.
What is the Effect of Treasury Stock on the Net Income?
As previously stated, the treasury stocks are not identified in the income statement, so it is not recognizable in the net income. The treasury stocks are lesser in number in the investors’ equity section of a cooperation’s accounting book or balance sheet. So there is neither gain nor loss in the net income.
As you would play a game of chess, investors play a game of Treasury Stocks. They are selling and buying them at their own accord to reap the best of the benefits and achieve organizational success. To check competition and emerge the successor and call checkmate, Treasury Stocks are reacquired and sold.
Accounting basics are easy if you get the hang of it; treasury stocks are none the different.