Treasury Stock on Balance Sheet
Treasury stock on a balance sheet represents the portion of shares that a company has issued but later repurchased and currently holds. It is not considered a part of the outstanding shares, and therefore these shares don’t have voting rights, aren’t entitled to dividends, and are not included in the computation of earnings per share.
On the balance sheet, treasury stock is recorded as a contra equity account, meaning it’s shown as a negative number within shareholders’ equity. The reason it’s a contra account is that it offsets or reduces the total shareholders’ equity. This is logical, as the repurchase of shares uses company resources, essentially reducing the equity value attributable to shareholders.
Example of Treasury Stock on Balance Sheet
Let’s delve into a hypothetical scenario to understand how treasury stock might be presented on a balance sheet.
Scenario:
StarTech Inc. has been in operation for several years. Over this period, it has issued shares, generated profits, and also decided to buy back some of its own shares. Here’s the financial data:
- Common Stock Issued (at par value of $1): $200,000
- Additional Paid-in Capital: $800,000 (This represents the amount received from shareholders above the par value when shares were issued.)
- Retained Earnings: $500,000 (This is the cumulative profit the company has made over the years, not distributed as dividends.)
- Treasury Stock (cost of shares the company repurchased): -$100,000
Using the above data, we can present StarTech Inc.’s equity section on the balance sheet.
StarTech Inc. Balance Sheet (Equity Section)
Shareholders’ Equity:
- Common Stock: $200,000
- Additional Paid-in Capital: $800,000
- Retained Earnings: $500,000
- Treasury Stock: -$100,000
- Total Shareholders’ Equity: $1,400,000
From the above presentation:
- StarTech Inc. initially raised $1,000,000 from its share issuance (Common Stock + Additional Paid-in Capital).
- Over its years of operation, it accumulated $500,000 in retained earnings.
- StarTech then repurchased its shares costing $100,000, leading to a treasury stock amount of -$100,000. This reduces the total shareholders’ equity.
- The total shareholders’ equity thus stands at $1,400,000.
The treasury stock reduces the total equity of StarTech Inc. because resources (cash) were used to buy back the shares. It’s a representation of returning capital to shareholders.
