Treasury stocks or treasury shares are shares that are outstanding acquired by the company from the shareholders which will not be traded publicly.
Share that are bought back are classified as treasury stocks. These still exist in a stock format within the company and not yet expired. Unlike publicly traded stocks, any kind of ownership perks is futile on providing them. Treasury shares are not provided with voting power as they are held within the firm, voting on management decisions are meaningless. Dividends on those stocks go with the same operation as voting rights.
A repurchase of equity shares reduces the free float of the stock hereby reducing the market capitalization. As the firm is buying back its ownership back it is not said to be an investment made in the firm. Thereby reducing the cost of equity capital.
Treasury stocks = Total stocks – Free float
Treasury shares plus the outstanding shares gives the total shares issued by the company.
It is usually the other way around, Shares available to the public = Total stocks – Treasury stocks
Shares that are bought back aren’t the only way treasury stocks accumulate, authorised shares that are never issued to the public to trade are also considered as treasury shares. The buyback is a method of allocating capital efficiently, to reacquire the ownership which was earlier issued to raise equity capital, basically buying the ownership back.
Is treasury stock a contra equity account?
A contra account is created when an amount in the future will be deducted or will be added to it whenever the business wants to use them. Certainty in making use of it determines whether a contra account should be inflated or to be utilised soon. Treasury stocks are of the same kind, they can be bought from the public and issued to employees as ESO or to pledge for low cost capital. Contra account is used when the management is well aware of the purpose of creating them.
Is treasury stock an asset?
Buying and issuing of shares are purely equity transactions, as already mentioned buybacks are not investments and come under the equity segment of the balance sheet. Albeit they are suffixed with shares, they aren’t traded and the value of them doesn’t budge. This clearly violates the leading purpose of an investment. Therefore treasury stock is not an asset.
Gains and losses in buying shares are aren’t recognized by accounting rules. The cash goes down by the same amount as the shareholder’s equity going down, holding on to the fundamental accounting equation (A=E+L).
Is treasury stock good?
Bought back shares don’t come under shareholder’s equity, if buybacks increase the exposure to equity reduces by the same. Therefore treasury stocks reduce equity.