When a company buys back its own shares, the nominal value of shares cancelled comes off share capital and the rest of the price is normally charged to distributable reserves. If the purchase is made wholly out of profits, an amount equal to the nominal value cancelled must also be moved into a capital redemption reserve under section 733 of the Companies Act 2006. Shares kept as treasury shares are not cancelled; FRS 102 paragraph 22.16 requires the price paid to be deducted from equity, with no gain or loss ever taken to profit or loss.
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What are the basic entries for a buyback?
The company law conditions, approvals and filings are covered in the share buyback guide. This page deals with what the bookkeeper and the accounts preparer do once the purchase has happened.
Three statutory rules drive the entries. Section 691 requires the shares to be fully paid and to be paid for on purchase (a private company buying for an employees’ share scheme is the exception). Section 692(2) says a limited company may only purchase its own shares out of distributable profits or the proceeds of a fresh issue made for the purpose, and that any premium payable on the purchase must come from distributable profits, subject to the fresh issue rule in section 692(3). Section 706 says that unless the treasury share rules apply, the shares are treated as cancelled and issued share capital falls by their nominal value.
For an ordinary buyback funded from profits the entries are therefore:
- Debit share capital with the nominal value of the shares bought.
- Debit the profit and loss reserve with the excess of the price over nominal value.
- Credit cash with the full price.
- Debit the profit and loss reserve and credit a capital redemption reserve with the nominal value cancelled.
Nothing passes through the profit and loss account. Under paragraph 22.9 of FRS 102, transaction costs of an equity transaction, such as legal fees, are also deducted from equity rather than expensed.
Why is a capital redemption reserve needed?
Cancelling shares reduces share capital, which is one of the protections creditors rely on. Section 733 restores that protection by making the company set aside an undistributable reserve in three situations:
- shares are redeemed or purchased wholly out of profits: the amount by which issued share capital falls is transferred to the reserve (section 733(2));
- shares are bought wholly or partly from a fresh issue and the proceeds are less than the nominal value bought: the shortfall is transferred (section 733(3)), unless a private company also uses a payment out of capital;
- treasury shares are cancelled: the reduction in share capital is transferred (section 733(4)).
Section 733(5) lets the reserve be used to pay up fully paid bonus shares. Otherwise, section 733(6) applies the rules on reduction of share capital as if the reserve were paid up share capital, so it cannot be distributed without a formal reduction of capital.
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How does a fresh issue of shares change the entries?
A company can issue new shares to fund the buyback. The new shares are recorded in the normal way, with share capital and share premium credited. Under section 692(3), if the shares being bought were originally issued at a premium, any premium payable on their purchase may be met from the fresh issue up to the lower of the premiums originally received on those shares and the current balance on the share premium account. Section 692(4) then reduces the share premium account by the amount so applied. Any premium beyond that limit must still come from distributable profits.
What changes when a private company pays out of capital?
A private company that lacks enough distributable profits can use a payment out of capital under Chapter 5 of Part 18. Section 710 defines the permissible capital payment as the amount needed to meet the price after first applying available profits and the proceeds of any fresh issue. Section 692(1ZA) also lets a private company, if its articles allow, buy back out of capital without following Chapter 5, up to an aggregate price in a financial year of the lower of £15,000 and the nominal value of 5% of its fully paid share capital at the start of that year.
Section 734 sets the accounting:
- if the permissible capital payment is less than the nominal value of the shares bought, the difference goes to the capital redemption reserve (section 734(2));
- if it is more, the excess may be charged against the capital redemption reserve, share premium account, fully paid share capital or unrealised profits held in a revaluation reserve (section 734(3)).
How are treasury shares accounted for?
Section 724 allows a limited company that buys its own shares out of distributable profits to hold them in treasury instead of cancelling them. The company is entered in its register of members as holder, but under section 726 it cannot exercise any rights, including voting, and no dividend or other distribution may be paid on them.
FRS 102 paragraph 22.16 requires the fair value of the consideration given for treasury shares to be deducted from equity, and prohibits any gain or loss in profit or loss on purchase, sale, transfer or cancellation. Appendix III to FRS 102, at paragraph A3.32, reminds companies that they must comply with both paragraph 22.16 and the Companies Act. Most companies show the deduction as a separate own shares reserve within equity.
Later events have their own rules:
- Sale. Section 727 allows treasury shares to be sold for cash or transferred for an employees’ share scheme. Under section 731, sale proceeds up to the purchase price paid are treated as a realised profit, and any excess must go to the share premium account. The purchase price is found on a weighted average basis.
- Cancellation. Under section 729(4) share capital falls by the nominal value cancelled, and section 733(4) requires that amount to be transferred to the capital redemption reserve.
How does it work in numbers?
Illustration only. A private company has 1,000 £1 ordinary shares, all issued at par, and a profit and loss reserve of £120,000. It buys back 200 shares from a departing shareholder for £50,000 out of distributable profits and cancels them.
| Entry | Debit | Credit |
|---|---|---|
| Share capital | £200 | |
| Profit and loss reserve (price above nominal) | £49,800 | |
| Cash | £50,000 | |
| Profit and loss reserve to capital redemption reserve | £200 | £200 |
Afterwards share capital is £800, the capital redemption reserve is £200 and the profit and loss reserve is £70,000. Total equity has fallen by exactly the £50,000 paid.
If the company had instead held the 200 shares in treasury, it would debit an own shares reserve with £50,000 and leave share capital at £1,000. If it later sold them for £60,000, section 731 would treat £50,000 as realised profit and require £10,000 to be credited to share premium, with no gain in the profit and loss account.
What has to be presented and disclosed?
Where a statement of changes in equity is presented, paragraph 6.3(c)(iii) of FRS 102 requires purchase of own share transactions to be shown separately from share issues and dividends. The notes on share capital and reserves should show the movement in shares in issue and in the capital redemption reserve. For a public company, Part 2 of Schedule 7 to the Large and Medium sized Companies and Groups (Accounts and Reports) Regulations 2008 requires the directors’ report to state the number and nominal value of shares purchased, the consideration paid and the reasons for the purchase. Buybacks are often with directors or their families, so related party disclosures may also apply.
What mistakes come up?
- Charging the premium on the buyback to share premium without a qualifying fresh issue, contrary to section 692(2)(b).
- Forgetting the capital redemption reserve transfer, which overstates distributable reserves for later dividends.
- Paying in instalments and recording a creditor, when section 691(2) requires payment on purchase except for employees’ share schemes.
- Recognising a gain or loss in profit or loss when treasury shares are sold, contrary to FRS 102 paragraph 22.16.
- Testing distributable profits against reserves that include unrealised revaluation gains; see unlawful distributions for the consequences.
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Related Accountapedia entries
- The capital redemption reserve
- Retained earnings and other reserves
- Treasury shares
- Small share buybacks: the de minimis exemption
- Recording share issues: share capital and share premium
- Can a child own shares in a company
- Accounting for growth shares
Sources
- legislation.gov.uk: Act 2006 c. 46, section 691
- legislation.gov.uk: Act 2006 c. 46, section 692
- legislation.gov.uk: Act 2006 c. 46, section 706
- legislation.gov.uk: Act 2006 c. 46, section 733
- legislation.gov.uk: Act 2006 c. 46, section 710
- legislation.gov.uk: Act 2006 c. 46, section 734
- legislation.gov.uk: Act 2006 c. 46, section 724
- legislation.gov.uk: Act 2006 c. 46, section 726
- legislation.gov.uk: Act 2006 c. 46, section 727
- legislation.gov.uk: Act 2006 c. 46, section 729
Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.