Here are more briefly explained of Journal Entries for Buyback of Shares. A buyback of shares occurs when a company purchases its own shares from shareholders, reducing the number of shares outstanding. This process can be used to return surplus cash to shareholders or to increase the value of remaining shares.
Example Scenario
Let’s assume Company A buys back 1,000 of its own shares at ₹100 per share on 01-09-2024. The face value of each share is ₹10. This example will show multiple scenarios to give more clarity.
Journal Entries
1. Recording the Buyback of Shares (Basic Example)
Scenario: Buyback funded through cash reserves.
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 01-09-2024 | Equity Share Capital | 10,000 | Reducing the share capital (1,000 shares × ₹10 face value) | |
| 01-09-2024 | Securities Premium | 90,000 | Adjusting premium related to shares bought back (1,000 shares × ₹90 premium) | |
| 01-09-2024 | To Bank | 1,00,000 | Payment for buyback of shares (1,000 shares × ₹100 buyback price) |
Explanation:
- Equity Share Capital Account Debit: Reduces the share capital by the nominal value (face value) of the shares bought back.
- Securities Premium Account Debit: Adjusts the securities premium account for any premium paid over the face value.
- To Bank Account Credit: Reduces the bank account by the total amount paid for the buyback.
2. Transferring the Nominal Value to Capital Redemption Reserve
Scenario: Buyback funded through free reserves or securities premium.
If the buyback is done using free reserves or securities premium, the nominal value of the shares bought back needs to be transferred to the Capital Redemption Reserve to maintain the capital structure.
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 01-09-2024 | Retained Earnings/General Reserve | 10,000 | Transfer to Capital Redemption Reserve | |
| 01-09-2024 | To Capital Redemption Reserve | 10,000 | Maintaining the capital structure |
Explanation:
- Retained Earnings/General Reserve Account Debit: Adjusts the retained earnings or general reserve.
- To Capital Redemption Reserve Account Credit: Creates a capital redemption reserve equal to the nominal value of shares bought back.
Detailed Example with More Complex Scenario
Example Scenario
Let’s assume Company B buys back 500 shares at ₹150 per share on 01-10-2024. The face value of each share is ₹10. Additionally, the buyback includes brokerage fees of ₹1,000 and the company uses retained earnings for this transaction.
Journal Entries
1. Recording the Buyback and Associated Costs
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 01-10-2024 | Equity Share Capital | 5,000 | Reducing the share capital (500 shares × ₹10 face value) | |
| 01-10-2024 | Securities Premium | 70,000 | Adjusting premium related to shares bought back (500 shares × ₹140 premium) | |
| 01-10-2024 | To Bank | 75,000 | Payment for buyback of shares (500 shares × ₹150 buyback price) | |
| 01-10-2024 | Brokerage Fees | 1000 | Payment for brokerage fees | |
| 01-10-2024 | To Retained Earnings | 1,000 | Adjustment of retained earnings for brokerage fees |
Explanation:
- Equity Share Capital Account Debit: Reduces the share capital by the nominal value (face value) of the shares bought back.
- Securities Premium Account Debit: Adjusts the securities premium account for any premium paid over the face value.
- To Bank Account Credit: Reduces the bank account by the total amount paid for the buyback.
- To Retained Earnings Account Credit: Reflects the adjustment of retained earnings for brokerage fees.
2. Transferring the Nominal Value to Capital Redemption Reserve
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 01-10-2024 | Retained Earnings/General Reserve | 5,000 | Transfer to Capital Redemption Reserve | |
| 01-10-2024 | To Capital Redemption Reserve | 5,000 | Maintaining the capital structure |
Explanation:
- Retained Earnings/General Reserve Account Debit: Adjusts the retained earnings or general reserve.
- To Capital Redemption Reserve Account Credit: Creates a capital redemption reserve equal to the nominal value of shares bought back.
Conclusion
Recording the buyback of shares involves reducing the share capital and securities premium, paying for the buyback, and possibly creating a capital redemption reserve. Proper documentation of these entries ensures accurate financial reporting and compliance with statutory requirements. These examples provide clarity on how to handle different scenarios in the buyback process.