Why is treasury stock a contra equity account

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The purpose of the cookie is to determine if the user's browser supports cookies. Treasury shares reduce total shareholders' equity and are generally labeled as "treasury stock" or "equity reduction". There are two methods of accounting for treasury stock: the cost method and the par value method. The cost method uses the value paid by the company during the repurchase of the shares and ignores their par value; under this method, the cost of the treasury stock is included within the Stockholders' Equity portion of the balance sheet.

Under the cash method, at the time of the share repurchase, the treasury stock account is debited to decrease total shareholder's equity.

The cash account is credited to record the expenditure of company cash. If the treasury stock is later resold, the cash account is increased through a debit and the treasury stock account is decreased, increasing total shareholder's equity, through a credit.

In addition, a treasury paid-in capital account is either debited or credited depending on whether the stock was resold at a loss or a gain. Under the par value method, at the time of share repurchase, the treasury stock account is debited, to decrease total shareholder's equity, in the amount of the par value of the shares being repurchased.

The common stock APIC account is also debited to decrease it by the amount originally paid in excess of par value by the shareholders. The cash account is credited in the total amount paid out by the company for the share repurchase. 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.

ABC Company has excess cash and believes its stock is trading below its intrinsic value. The repurchase creates a treasury stock contra equity account. Retired shares are treasury shares that have been repurchased by the issuer out of the company's retained earnings and permanently canceled meaning that they cannot be reissued later. They have no market value and no longer represent a share of ownership in the issuing corporation. The cost method uses the value paid by the company during the repurchase of the shares and ignores their par value.

Under this method, the cost of the treasury stock is included within the stockholders' equity portion of the balance sheet. Securities and Exchange Commission. Financial Analysis. Stock Trading. You can find information on treasury stock in the consolidated balance sheet of a company. Here, treasury stock has a negative balance and reduces total equity. The section has details on treasury stock at the beginning and at the end of the year.

It also includes the details of any stock issuance during the year. As we noted before, shares outstanding equals the number of shares issued sold for the first time minus the number of shares of treasury stock a corporation has reacquired.

When treasury stock is purchased, the number of shares issued remains unchanged, but the number of shares outstanding decreases. When treasury stock is purchased, the Treasury Stock account is debited for the number of shares purchased times the purchase price per share. It is not an asset account. Treasury stock may be resold to stockholders at the same, a higher, or a lower price than it was purchased for.

When sold, the Treasury Stock account can only be credited in multiples of its original purchase price per share.