Treasury stock debit or credit?
Is treasury stock debit or credit? Treasury stocks are previous outstanding stock that has been bought back by the issuing company from stockholders. Due to the buyback of these shares, the total number of outstanding shares on the open market decreases. This means that treasury stock reduces equity, and as such would be a debit balance and not a credit balance.
Transactions that are recorded in accounting usually have a debit or credit balance. For every transaction, an amount must be recorded as a credit in one account (right side of the balance sheet) and as a debit in another account (left side of the balance sheet). This accounting system is called a double-entry system and provides accuracy in accounting records and financial statements.
Since treasury stocks are buyback shares, how are they recorded in the double-entry system? This article aims to answer the question of whether a treasury stock is recorded as a debit or credit. But first, let’s have an understanding of debits and credits.
Related: Accounts receivable: Debit or Credit?
Understanding debits and credits
Every business transaction has a monetary impact on the financial statements of a company. When accounting for every transaction, the numbers are recorded in two accounts, under the debit and credit columns. The debit column is positioned on the left-hand side of the ledger whereas the credit column is positioned on the right-hand side of the ledger.
Debits are accounting entries that either increase an expense or asset account, or decrease an equity or liability account. A debit is positioned to the left in an accounting entry. Credits, on the other hand, are accounting entries that either increase equity or liability accounts or decrease an expense or asset account. In an accounting entry, a credit entry will be positioned to the right.
This means that when an asset is increased, the change is a debit because something has to be due for that increase (the price of the asset). Conversely, an increase in liabilities is a credit because it signifies an amount that has been used to purchase something (the cause of the corresponding debit in the assets account) and the money loaned to you that would be paid back.
Therefore, debit and credit signify actual accounting functions which cause increases and decreases in accounts, depending on the type of account. All accounts that usually contain a debit balance will increase in amount when a debit (left column) is added to them and reduce in amount when a credit (right column) is added to them. Expenses, dividends and assets are the types of accounts that increase with debit and reduce with credit.
Conversely, all accounts that usually have a credit balance will increase in amount when a credit (right column) is added to them and reduce in amount when a debit (left column) is added to them. Liabilities, revenues, and equity are the type of accounts that increase with credit and decrease with debit. Moreso, all accounts can also be debited or credited depending on the kind of transaction that takes place.
Therefore, the transactions that are recorded in accounting usually have a debit or credit balance. For every transaction, an amount must be recorded as a credit in one account and as a debit in another account. This accounting system is called a double-entry system and provides accuracy in accounting records and financial statements.
Double-entry system
According to Pacioli’s method of bookkeeping or double-entry accounting, in a ledger or balance sheet, assets equal liabilities plus shareholders’ equity. Therefore, an increase in the value of assets would be a debit to the account and a decrease would be a credit to the account. Conversely, an increase in liabilities/ shareholders’ equity would be a credit to the account and a decrease would be a debit.
Bookkeepers use the double entry method to enter each debit and credit in two accounts on the balance sheet. Therefore, whenever an accounting transaction is recorded, at least two accounts are always impacted with a debit entry being reported against one account and a credit entry reported against another account.
For instance, a company issuing out common stocks to shareholders will cause a debit in the Bank or Cash account and a credit in the Common stock account. More so, a company buying back shares will cause a debit in the Treasury stock account and a credit in the Bank or Cash account.
In addition, when a company purchases a vehicle using cash, the asset account Vehicles would be debited and the asset account Bank or Cash will be simultaneously credited since the payment for the vehicle was done using cash. This is why the accounting system is said to be a double-entry system.
Hence, the use of debits and credits in the two-column transaction recording format is the most crucial of all controls over accounting accuracy. Nevertheless, a transaction may involve more than two accounts, for example, when a company pays a loan to its bank, three accounts are involved which are Cash accounts, Notes Payable accounts, and Interest Expense accounts.
In general, the total amount of debits must equal the total amount of credits in a transaction. If not, the accounting transaction is considered to be unbalanced and unbalanced transactions make it impossible to create financial statements.
Furthermore, some balance sheet items have corresponding ‘contra’ accounts, with negative balances, that offset them. Examples are accumulated depreciation that offset equipment, treasury account against shareholders’ equity, and allowance for bad debts (also known as allowance for doubtful accounts) that offset accounts receivable.
The term contra is utilized by United States GAAP for specific accounts only and does not recognize the second half of a transaction as a contra. Hence, the term is restricted to accounts that are related.
For instance, sales returns and allowance as well as sales discounts are contra revenues with respect to sales. Therefore, the balance of each contra revenue (a debit) is the opposite of revenue/sales (a credit). Likewise, treasury stock is contra equity with respect to retained earnings (shareholders’ equity), thus, the balance of contra equity (a debit) is the opposite of retained earnings (a credit).
Conclusively, when recording business transactions, accounts could be classified and treated either as an asset, liability, contra account, revenue, shareholders’ equity, expense, or dividend account. Each of these account transactions can be recorded as a credit to one account and a debit to another account using the modern or traditional approaches in accounting. The table below shows the normal balances of various account transactions with treasury stock which is our main focus highlighted in the table:
| Accounts | Type of account | Debit or credit |
|---|---|---|
| Inventory | Asset | Debit |
| Wages expense | Expense | Debit |
| Retained earnings | Shareholders’ equity | Credit |
| Accounts payable | Liability | Credit |
| Treasury stock | Contra account (for Shareholders’ equity) | Debit |
| Revenue | Revenue | Credit |
| Common shares | Dividend | Credit |
| Cost of goods sold | Expense | Debit |
| Accumulated depreciation | Contra account (for Asset) | Credit |
| Accounts receivable | Asset | Debit |
| Investment in shares | Asset | Debit |
| Allowance for doubtful accounts | Contra account (for Asset/Revenue) | Credit |
Related: Common stock: debit or credit?
What is treasury stock?
Treasury shares when issued are no longer outstanding and are not included in the distribution of dividends or the calculation of earnings per share (EPS). Also, treasury shares have no voting rights. They represent the number of shares repurchased from the open market, and as such reduce shareholders’ equity by the amount paid for the shares.
The amount of treasury stock repurchased by a company may be limited by its nation’s regulatory body; in the United States, for instance, the Securities and Exchange Commission (SEC) governs the buyback of shares.
What does the company do with these repurchased shares? Treasury shares can be held by the company for resale in the open market or can be retired. Retired shares are the shares that are permanently canceled and cannot be reissued later. Once treasury stock is retired, the shares are no longer listed as treasury stock on the company’s financial statements. Whereas, the non-retired treasury shares can be reissued through employee compensation, stock dividends, or capital raising.
Treasury stock on the balance sheet
On the balance sheet, the stockholders’ equity section has two main headings which are the paid-in capital and retained earnings. However, treasury stock is listed under its own heading below the retained earnings heading in the stockholders’ equity section.
When a company issues out stock initially, the equity section of the balance sheet is increased through a credit to the common stock and the additional paid-in capital (APIC) accounts. The common stock account reflects the par value of the shares, whereas the APIC account reflects the excess value received over the par value.
According to double-entry bookkeeping, the offset of this journal entry would be a debit to increase cash (or other assets) in the amount of the consideration received by the shareholders. Therefore, in order to record the repurchase of shares, the treasury stock account is debited and the cash account in the asset section is credited.
Related: Expense- Debit or Credit?
Is treasury stock a debit or credit?
Treasury stock is considered a contra equity account because it is classified within the equity section of the balance sheet where it reduces the other equity accounts that have a natural credit balance. Contra-equity accounts have a natural debit balance and reduce the total amount of equity owned. This means that an increase in treasury stock causes the shareholders’ equity value to decrease.
On the balance sheet, treasury stock is shown as a negative value and additional repurchases of shares would cause the figure to decrease further. Hence, the share repurchase is reflected as a cash outflow on the cash flow statement. Therefore, after a repurchase, the journal entries are recorded as a debit to treasury stock and a credit to the cash account.
Accounting for treasury stock methods
Because treasury shares reduce total shareholders’ equity, they are generally labelled as treasury stock or equity reduction on the balance sheet. When accounting for treasury stock, there are two methods used:
- Cost method
- Par value method
Cost method
During the repurchase of the shares, the cost method uses the value paid by the company for the shares and ignores their par value. Under the cost method, the cost of the treasury stock is included within the stockholders’ equity portion of the balance sheet.
Under this method, at the time of the share repurchase, the cash account is credited to record the expenditure of company cash, and the treasury stock account is debited to decrease total shareholders’ equity. If the treasury stock is later resold, the treasury stock account is decreased, increasing total shareholders’ equity, by credit and the cash account is increased by a debit. Additionally, depending on whether the stock was resold at a loss or a gain, a treasury paid-in capital account is either debited or credited.
That is, with the cost method, a company would list the amount reissued in the contra equity account and the total buyback amount (treasury stock) is listed as a debit while the total cost of resales is listed as cash under credit.
Par value method
Under the par value method, the treasury stock account is debited, at the time of share repurchase, to decrease total shareholders’ equity, in the amount of the par value of the shares being repurchased. Also, the common stock APIC account is debited by the amount originally paid in excess of par value by the shareholders, thus decreasing it.
The cash account, on the other hand, is credited in the total amount paid out by the company for the share repurchase. Then, the net amount is included as either a debit or credit to the treasury APIC account, depending on whether the company paid more when repurchasing the stock than the shareholders did originally. That is, under the par value method, the total value of the treasury shares is listed as treasury stock under debit, whereas the total amount of profit from resales is listed as cash under credit.
Journal entry for reselling of treasury stock
If a company chooses to resell its shares, it must make the necessary changes to its balance sheet. The company can record its earnings after reselling treasury stock in two ways- either at a profit or at a loss:
Treasury stock at a profit
A company can record its earnings after the resell of treasury stock at a profit if it is selling its shares at a higher price than it did initially. In this case, the company would record the total amount of the transaction as cash under debit. Then, the original value of the shares is listed as treasury stock under credit. The additional value of when the shares were resold is listed as paid in capital treasury stock under credit.
Treasury stock at a loss
Another way to record a reissue of a company’s treasury stock is treasury stock at a loss. This should be used if the company resells its shares at a lower price than it paid for them. In such an instance, the company would list the reduced amount earned as a debit to the cash account, and the stock’s value listed as a credit to the treasury stock account. The amount of profit a company has left would then be listed as retained earnings under debit.
Treasury stock journal entry when retired
If the board of directors decides to retire the treasury stock at the time it is repurchased, the stock is canceled and no longer considered issued. In such a situation, the common stock and additional paid‐in‐capital accounts are decreased by a debit entry for the amounts recorded in these accounts when the stock was originally issued and the cash account is decreased by a credit entry for the amount paid to repurchase the stock. That is if the board of directors elects to retire the shares, the common stock, and additional paid-in capital (APIC) account would be debited, whereas the treasury stock account would be credited.
If the amount used to repurchase the shares is more than the original issue price, the difference is a decrease (debit) to the additional paid‐in‐capital treasury stock account until its balance reaches zero. If there is no additional paid‐in‐capital—treasury stock account or the balance of the additional paid‐in‐capital—treasury stock account reaches zero, the difference is a decrease (debit) to retained earnings. But in a situation whereby the repurchase price is less than the original selling price, the difference increases and is credited to the additional paid‐in‐capital account.
In a situation whereby the company wants to resell the previously retired shares at a higher price than the original price (when retired), the cash account would be debited by the sale amount, and the treasury stock would be credited by the original amount, but the additional paid-in capital (APIC) account would be credited to ensure both sides balance.
See also: Is Accumulated Depreciation Debit or Credit?
Treasury stock debit or credit? (examples)
There may be several journal entries for treasury stock relating to it being reissued, retired, or recorded via cost or par value method. In our examples below, we will be looking at the basic and common journal entries relating to treasury stock.
Journal entry for buying back shares
Assume an automobile company (Company XYZ) decides to buy back its shares for $100 million. Say the company buy back 1 million shares for $100 each. The company must record this transaction in shareholders’ equity on its balance sheet. Hence, Company XYZ will list $100 million as cash under credit and $100 million as treasury stock under debit.
The journal entry will be reported as follows:
| ACCOUNT | DEBIT | CREDIT |
|---|---|---|
| Cash | $100 million | |
| Treasury stock | $100 million |
Recording treasury stock using cost method or par value method
Company XYZ must now decide how to account for its acquired treasury stock. It can account for its treasury stock by using the cost method or the par value method.
Company XYZ may consider the cost method if their stocks are relatively low and the company is optimistic about a treasury stock’s future resell value. Using the cost method approach, Company XYZ will list $100 million as treasury stock under debit and the total cost of resales (to be determined) will be listed as cash under credit.
Company XYZ may use the par value method if it is focused on the individual values of shares. Using the par value method, the company will list $100 million as treasury stock under debit and the total amount of profit that results from a resale (to be determined) will be listed as cash under credit.
Journal entry for when treasury stock is reissued
If Company XYZ decides to reissue its treasury stock due to a rise in value, it can record the stock at a profit method. The original value of $100 million that the shares were purchased at will be listed as treasury stock under credit. Since the value of the individual shares increased and the company sold the 1 million treasury shares for $175 each, the company would list the $175 million received as cash under debit. The additional value that the shares were sold for should amount to $75 million. This additional amount would be listed as paid-in capital treasury stock under credit.
The journal entry for this transaction will be recorded as:
| ACCOUNT | DEBIT | CREDIT |
|---|---|---|
| Cash | $175 million | |
| Treasury stock | $100 million | |
| Additional paid-in capital (treasury stock) | $75 million |
Alternatively, if Company XYZ decides to reissue its treasury stock due to a decrease in value, it can use the stock at a loss method to record its figures. Say, the company sold the 1 million treasury shares for $80 each, the company would list the reduced amount of $80 million earned as cash under debit. Then, the stock’s value of $100 million would be listed as treasury stock under credit. The amount of $20 million balance that the company has left, would be listed as retained earnings under debit.
The journal entry for this transaction will be recorded as:
| ACCOUNT | DEBIT | CREDIT |
|---|---|---|
| Cash | $80 million | |
| Retained Earnings | $20 million | |
| Treasury stock | $100 million |
See also: Liabilities vs Assets Differences and Similarities
