What Is The Meaning Of Treasury Stock And How Is It Represented/Classified In The Balance Sheet?

January 15th, 2009 Comments off
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Can you tell me (a) what is the meaning of treasury stock and (b) how is it classified in the Balance Sheet?

Answer to (a):

When a company buys its own stock in the open market, the stock re-purchased is called Treasury Stock.

Where there is a difference between the number of shares issued and the number of shares outstanding, it is because of treasury stock. Please note that once a stock has been issued to the public, it is counted as issued, but if it is repurchased by the company and held as treasury stock, it is NOT included in the total of the stock outstanding.

For example, in Company ABC Ltd:

$

Number of shares authorized

1,000,000

Number of shares issued

700,000

Number of treasury shares

300,000

Total Number of Shares Outstanding (700,000-400,000)

400,000

Answer to (b):

So how is the Treasury Stock being Classified in the Balance Sheet?

When a company goes into the market to buy its own stock, it records the amount paid as a debit to Treasury stock. This Treasury stock is a reduction in the stockholders’ equity section and a credit to Cash for the amount paid for the stock. (Debit: Treasury stock and Credit:Cash)

The stockholders’ equity section of the Balance Sheet appears as follows:

$

Share Capital issued

1,000,000

Less: Treasury Stock

(200,000)

Total contributed capital

800,000

Retained earnings

100,000

Total stockholders; equity

900,000

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Financial Accounting

 
 

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