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A share buyback, also called a share repurchase, occurs when a company buys outstanding shares of its own stock from investors. This stock can either be retired or held on the books as "treasury stock." There are numerous motives for executing a share buyback. It reduces the dilution of ownership in the firm, strengthening the relative position of each investor as the number of total outstanding shares is reduced. It can also be used to improve the firm's financial metrics, as returns on both assets and equity will increase. Learning how to account for a share buyback is a matter of understanding how each account will be affected and recording the proper journal entries.
Steps
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Repurchase the shares of stock you want to buy back. You will have to determine the number of shares you want to buy back in order to figure the total you will be paying out in cash in exchange for the shares. So, if you buy back 10,000 shares of stock at $15 per share, you will pay out $150,000 in cash. [1] X Research source
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Record the transaction in the treasury stock account. You will label the debit (the amount you paid to buy back the stock) as "treasury stock." Underneath, notate a credit for the same amount in cash. Using the example of 10,000 shares from step one, you will label a debit of $150,000 as "treasury stock," and a credit for the same amount as "cash." [2] X Research source
- Treasury stock is a contra-equity account. It is not treated as an asset, because a company cannot legally invest in its own stock. Rather, treasury stock is presented on the balance sheet, where it reduces the total amount of owner's equity.
- If the shares are purchased with another asset (for example, land instead of cash), that asset account should be credited instead.
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Understand that you may choose to resell the stock. If you do not resell the stock, you must retire it. Should you resell it, you will list the resale as a cash debit for the sale amount, plus a credit for any additional paid-in capital (that is, profit from reselling the stock at a higher value) in the treasury stock account. [3] X Research source
- You will list the sale amount minus the additional paid-in capital as a credit for that amount marked "treasury stock."
- Reselling the 10,000 shares in the example from step one at $17 per share would mean you would notate the resale as a cash debit in the amount of $170,000, along with an additional paid-in capital credit of $20,000 and a treasury stock credit of $150,000.
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Understand that you may retire the shares. Retiring the shares requires you to notate in the treasury stock account the par value of the common stock—which is the face value of the stock—as a debit.
- If your 10,000 shares of stock from the example in step one had a par value of $1 each, you would notate that as "common stock, $1 par value" along with a debit in the amount of $10,000.
- You would list the amount paid above the par value as an additional paid-in capital debit, which would mean $140,000 for the example in step one.
- You would need to notate a treasury stock credit in the full amount, which would be $150,000 for the 10,000 share example. [4] X Research source
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Buy back the number of shares of stock your board has decided on. Multiply the number of shares by the price per share to determine the amount of money you will have to pay out. If you were buying back 10,000 shares with a par value of $1 originally sold for $12 each at $15 per stock, you would pay out $150,000. [5] X Research source
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Record the transaction. You will need to list the common stock as a debit for the par value, so 10,000 shares with a par value of $1 would be listed as "common stock, par value $1" with a debit amount of $10,000. Notate the original sale price minus the par value as additional paid-in capital. [6] X Research source
- Since the 10,000 shares in the example were originally sold at $12 per share, the additional paid-in capital debit amount would be $110,000.
- The remaining $30,000 from the 10,000 shares bought back at $15 per share will be notated as a retained earnings debit.
- Finish the notation with a cash credit in the full amount—the example would be a cash credit of $150,000.
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Understand that the common stock and additional paid-in capital amounts are eliminated. Using the constructive retirement method for the buy back of shares eliminates the common stock and additional paid-in capital amounts so they can be written in as a credit along with the retained earnings. This method is used when it is assumed that the stock will not be reissued. [7] X Research source
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Expert Q&A
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QuestionIf the company is buying back shares at a valuation well in excess of their issued or par value and it has no accumulated profits but an asset revaluation reserve, should the excess of the buy-back over the par value be debited against the reserve account or added to accumulated losses?Darron Kendrick is an Adjunct Professor of Accounting and Law at the University of North Georgia. He received his Masters degree in tax law from the Thomas Jefferson School of Law in 2012, and his CPA from the Alabama State Board of Public Accountancy in 1984.According to the IAS 16, the loss on the stock buy back would be charged to accumulated losses in this situation and not to the revaluation reserve. The revaluation reserve is adjusted only for valuation changes to fixed assets or fixed asset retirements. With no accumulated or retained earnings, the resulting buy back loss would be a current period addition to accumulated losses on the balance sheet only. There should be no gain or loss recorded in the income statement from a buyback.
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QuestionDo redeemed shares of a company earn dividends?Darron Kendrick is an Adjunct Professor of Accounting and Law at the University of North Georgia. He received his Masters degree in tax law from the Thomas Jefferson School of Law in 2012, and his CPA from the Alabama State Board of Public Accountancy in 1984.No. Only shares issued and outstanding.
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Tips
- The sample calculations above will work equally well when expressed in other currencies.Thanks
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References
- ↑ https://www.accountingtools.com/articles/treasury-stock-accounting-cost-method-and-constructive-retirement-method
- ↑ https://www.accountingtools.com/articles/treasury-stock-accounting-cost-method-and-constructive-retirement-method
- ↑ https://www.accountingtools.com/articles/treasury-stock-accounting-cost-method-and-constructive-retirement-method
- ↑ https://www.accountingtools.com/articles/treasury-stock-accounting-cost-method-and-constructive-retirement-method
- ↑ https://www.accountingtools.com/articles/treasury-stock-accounting-cost-method-and-constructive-retirement-method
- ↑ https://www.accountingtools.com/articles/treasury-stock-accounting-cost-method-and-constructive-retirement-method
- ↑ https://www.accountingtools.com/articles/treasury-stock-accounting-cost-method-and-constructive-retirement-method
About This Article
Article Summary
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A share buyback is when a company buys up its own stock from investors in order to increase the value of the remaining shares or to increase assets and equity. In order to account for share buyback, you need to calculate how the shares you purchase affect the rest of the stock. Start by determining the number of shares you want to buy back so you can figure out the total you’ll be paying for them. For example, if you want to buy back 100 shares at $5 a share, then you’ll have to pay $500. If you choose to resell the stock later you can sell them at a higher value to make a profit. You can also retire the shares, which would then increase the value of the remaining shares that still exist because there are now fewer total shares. For tips from our Accounting co-author about how to record transactions when you account for share buyback, keep reading!
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Reader Success Stories
- "As a CPA professional who has no "listed" clients, the first example, "cost/cash," confirmed my assumptions. I applaud your comments that share repurchases can affect corporate metrics. I would encourage you to slightly expand on that area and note that: when the stock being repurchased was issued through a company's "employee/executive stock option program," the effect on corporate metrics may make it more likely for "employees/executives" to regularly qualify for continuing stock-option awards." ..." more
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"As a CPA professional who has no "listed" clients, the first example, "cost/cash," confirmed my assumptions. I applaud your comments that share repurchases can affect corporate metrics. I would encourage you to slightly expand on that area and note that: when the stock being repurchased was issued through a company's "employee/executive stock option program," the effect on corporate metrics may make it more likely for "employees/executives" to regularly qualify for continuing stock-option awards."
..."
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"Understood the basics about buy back and its accounting. It's of great help."
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