Treasury Stock
What is Treasury Stock?
When a company buys back some of its own shares, the stock is known as treasury stock.
![ts1](https://seeaccountingnow.online/wp-content/uploads/2021/08/ts1.jpg)
How it Works
One way for a company to raise money is by way of a share issue.
![ts2](https://seeaccountingnow.online/wp-content/uploads/2021/08/ts2.jpg)
This means the company will sell a certain number of shares to investors.
![ts3](https://seeaccountingnow.online/wp-content/uploads/2021/08/ts3.jpg)
There are occasions when a company will buy back some of its own shares from investors.
![ts4](https://seeaccountingnow.online/wp-content/uploads/2021/08/ts4.jpg)
The company may do this if its shares have been heavily beaten down in the market place.
![ts5](https://seeaccountingnow.online/wp-content/uploads/2021/08/ts5.jpg)
By buying back shares, the company reduces the supply of shares available in the market place and prices recover.
![ts6](https://seeaccountingnow.online/wp-content/uploads/2021/08/ts6.jpg)
They may also buy back shares to improve metrics, such as the earnings/assets ratio.
![ts7](https://seeaccountingnow.online/wp-content/uploads/2021/08/ts7.jpg)
If a business has many assets but achieves low earnings, the earnings/assets ratio is seen as inefficient.
![ts8](https://seeaccountingnow.online/wp-content/uploads/2021/08/ts8.jpg)
It is better that the business achieves a higher earnings to assets ratio.
![ts9](https://seeaccountingnow.online/wp-content/uploads/2021/08/ts9.jpg)
Sometimes, however, this ratio can be poor due to factors unrelated to actual business performance.
![ts10](https://seeaccountingnow.online/wp-content/uploads/2021/08/ts10.jpg)
In-other-words, the business is operating at maximum efficiency but the earnings/asset ratio is inefficient.
![ts11](https://seeaccountingnow.online/wp-content/uploads/2021/08/ts11.jpg)
This could happen if the business is holding too much cash.
![ts12](https://seeaccountingnow.online/wp-content/uploads/2021/08/ts12.jpg)
Cash at the bank is an asset of the company.
![ts13](https://seeaccountingnow.online/wp-content/uploads/2021/08/ts13.jpg)
Holding too much cash inflates total asset value.
![ts14](https://seeaccountingnow.online/wp-content/uploads/2021/08/ts14.jpg)
This, in turn, throws the earnings/asset ratio out.
![ts15](https://seeaccountingnow.online/wp-content/uploads/2021/08/ts15.jpg)
The company can alleviate this situation by using some of the cash held in the bank to buy back shares.
![ts16](https://seeaccountingnow.online/wp-content/uploads/2021/08/ts16.jpg)
This will reduce total assets held by the company and bring the earnings/asset ratio into kilter.
![ts17](https://seeaccountingnow.online/wp-content/uploads/2021/08/ts17.jpg)
Repurchased shares are something the business owns, but they are not held as an asset.
![ts18](https://seeaccountingnow.online/wp-content/uploads/2021/08/ts18.jpg)
Instead, they are held in a contra equity account.
![ts19](https://seeaccountingnow.online/wp-content/uploads/2021/08/ts19.jpg)
© R.J. Hickman 2020