The treasury stock definition is the shares a company buys of its own stock on the open market. Shares of treasury stock were issued by the company, and then repurchased. So consider it issued, but not outstanding. After a company repurchases shares of its own stock, there are fewer shares of its stock trading on the open market.
Treasury stock can either be retired (cancelled) or resold on the open market. In addition, the shares have no voting rights, and they do not pay or accrue dividends. It is not included in financial ratios that use the value of common stock.
Record treasury stock in the owner’s equity section of the balance sheet. Then record it at cost – what the company paid to acquire the shares – and subtract the value of the treasury stock from the stockholders’ equity account. The treasury stock account is a contra-equity account.
There are several reasons why a company would repurchase its own shares, including the following.
2. Fewer outstanding shares increase the value per share, so a company might buyback shares to benefit its shareholders. For tax reasons, a share buyback can be superior to paying dividends to shareholders. (Depending on the difference between the tax rate that applies to dividends and the tax rate that applies to capital gains.)