by The buyback of shares is an important financial decision that reduces a company’s equity share capital and impacts its reserves and liquidity. The Companies Act, 2013 (Section 68) and Accounting Standards (AS) govern the buyback process in India. The company must ensure that it follows proper accounting treatment while recording buyback transactions.
Step-by-Step Accounting Treatment of Buyback:
The following journal entries are recorded for buyback transactions:
| Step | Transaction | Journal Entry | Debit (Dr.) | Credit (Cr.) |
|---|---|---|---|---|
| 1 | Transfer to Buyback Account (To ensure funds are set aside for buyback) | Buyback of Equity Shares A/c Dr. To Bank A/c | Buyback of Equity Shares A/c ₹XXX | Bank A/c ₹XXX |
| 2 | Cancellation of Share Capital (Reduction in equity capital after buyback) | Equity Share Capital A/c Dr. To Equity Shares Buyback A/c | Equity Share Capital A/c ₹XXX | Equity Shares Buyback A/c ₹XXX |
| 3 | Premium on Buyback (if applicable) (If buyback price is higher than face value, adjust the excess amount from Securities Premium/Free Reserves) | Securities Premium A/c Dr. General Reserve A/c Dr. To Equity Shares Buyback A/c | Securities Premium A/c ₹XXX General Reserve A/c ₹XXX | Equity Shares Buyback A/c ₹XXX |
| 4 | Transfer to Capital Redemption Reserve (CRR) (As per the Companies Act, the nominal value of shares bought back must be transferred to CRR) | General Reserve A/c Dr. To Capital Redemption Reserve A/c | General Reserve A/c ₹XXX | Capital Redemption Reserve A/c ₹XXX |
| 5 | Payment to Shareholders (Final payment for the buyback) | Equity Shares Buyback A/c Dr. To Bank A/c | Equity Shares Buyback A/c ₹XXX | Bank A/c ₹XXX |
illustration with Example
Let’s assume XYZ Ltd. decides to buy back 10,000 equity shares of ₹10 face value at ₹50 per share using free reserves.
Step 1: Identify Key Values
| Particulars | Amount (₹) |
|---|---|
| Number of shares bought back | 10,000 |
| Face value per share | ₹10 |
| Buyback price per share | ₹50 |
| Total Buyback Cost (10,000 × ₹50) | ₹5,00,000 |
| Nominal Value of Shares (10,000 × ₹10) | ₹1,00,000 |
| Premium Paid on Buyback (10,000 × ₹40) | ₹4,00,000 |
Step 2: Pass Accounting Entries
1. Transfer Buyback Amount to a Separate Account
| Journal Entry |
|---|
| Buyback of Equity Shares A/c Dr. ₹5,00,000 |
| To Bank A/c ₹5,00,000 |
| (Being amount transferred to buyback account for repurchase of shares) |
2. Cancellation of Equity Share Capital
| Journal Entry |
|---|
| Equity Share Capital A/c Dr. ₹1,00,000 |
| To Equity Shares Buyback A/c ₹1,00,000 |
| (Being cancellation of equity share capital for shares repurchased) |
3. Adjust Premium Paid on Buyback
| Journal Entry |
|---|
| Securities Premium A/c Dr. ₹4,00,000 |
| To Equity Shares Buyback A/c ₹4,00,000 |
| (Being premium on buyback adjusted from securities premium reserves) |
4. Transfer Nominal Value to Capital Redemption Reserve (CRR)
| Journal Entry |
|---|
| General Reserve A/c Dr. ₹1,00,000 |
| To Capital Redemption Reserve A/c ₹1,00,000 |
| (Being transfer of nominal value of shares bought back to CRR as per Companies Act, 2013) |
5. Payment to Shareholders
| Journal Entry |
|---|
| Equity Shares Buyback A/c Dr. ₹5,00,000 |
| To Bank A/c ₹5,00,000 |
| (Being payment made to shareholders for buyback of shares) |
Effect on Financial Statements:
The buyback of shares affects the company’s financial statements in the following ways:
1. Balance Sheet (Post Buyback)
| Particulars | Before Buyback (₹) | After Buyback (₹) |
|---|---|---|
| Equity Share Capital | ₹10,00,000 | ₹9,00,000 |
| Securities Premium Reserve | ₹8,00,000 | ₹4,00,000 |
| General Reserve | ₹12,00,000 | ₹11,00,000 |
| Capital Redemption Reserve (CRR) | ₹0 | ₹1,00,000 |
| Bank Balance | ₹15,00,000 | ₹10,00,000 |
2. Cash Flow Statement
The buyback results in a cash outflow under financing activities of ₹5,00,000.
3. Notes to Accounts
-
Buyback of 10,000 equity shares at ₹50 each was completed.
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Capital Redemption Reserve of ₹1,00,000 was created.
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Securities Premium Reserve was reduced by ₹4,00,000.
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