Advanced Accounting · Buyback of Securities

Accounting Entries for Buyback and Capital Redemption Reserve

Updated 4 October 2026 · Fact-checked

Buyback entries record the cash paid, cancel the share capital bought back, and charge the premium to securities premium or free reserves. You then transfer an amount equal to the nominal value of shares bought back from free reserves or profits to Capital Redemption Reserve (CRR). No CRR arises on the part funded by a fresh issue.

Understand Accounting Entries for Buyback and Capital Redemption Reserve

When a company buys back its own shares, it pays cash and the shares are cancelled. Share capital falls. The company must also make sure that the capital base is not weakened by the cash outflow. That is the job of the Capital Redemption Reserve.

The price paid has two parts: the nominal value and the premium (price paid minus nominal value). The nominal value reduces share capital. The premium is a charge to securities premium or to free reserves, as the question directs. The premium is not charged to the Statement of Profit and Loss unless the question says so.

Under Section 69 of the Companies Act, 2013, when shares are bought back out of free reserves or the securities premium account, a sum equal to the nominal value of the shares bought back is transferred to CRR. The usual source for this transfer is free reserves (general reserve, profit and loss balance). If part of the buyback is funded by a fresh issue of a different kind of shares or securities, that part needs no CRR. So CRR = nominal value bought back − face value of proceeds of the fresh issue.

CRR is a capital reserve in nature. It can be used only for issuing fully paid bonus shares. It cannot be used to pay dividends. Only fully paid shares can be bought back. If the question says the buyback is out of free reserves, remember two charges to free reserves: the premium (if not covered by securities premium) and the CRR transfer.

Expenses of the buyback, such as brokerage or legal fees, are not part of the buyback price. They are charged to the Statement of Profit and Loss unless the question says otherwise.

Key rules to remember

Total buyback consideration: Number of shares × buyback price per share; This is the cash paid. Credit bank, debit the buyback account first.
Premium on buyback: (Buyback price − nominal value) × number of shares; Debit securities premium first if the question allows it, then the free reserves.
Capital Redemption Reserve: CRR = Nominal value of shares bought back − face value of fresh issue proceeds (if any); If there is no fresh issue, CRR = nominal value bought back. Section 69 requires this where buyback is out of free reserves or securities premium.
Buyback at par: Equity Share Capital Dr; To Bank; No premium. Still create CRR for the nominal value from free reserves.
Total hit on free reserves (no fresh issue): Premium not met from securities premium + CRR transfer; Use this to check that free reserves are sufficient.

How to solve Accounting Entries for Buyback and Capital Redemption Reserve questions

Use the same sequence for every buyback question. It keeps the entries in the right order and stops you missing the CRR.

1Read the question and list: number of shares, nominal value, buyback price, and the stated sources of funds (securities premium, free reserves, fresh issue).
2Compute the total consideration, the nominal value bought back and the premium.
3Pass the first entry: Buyback of Equity Shares A/c Dr; To Bank A/c, for the total consideration.
4Pass the second entry: debit Equity Share Capital for nominal value, debit securities premium and/or general reserve/profit and loss for the premium, and credit the buyback account.
5Compute CRR: nominal value bought back minus face value of any fresh issue proceeds. If it is a fresh issue, pass the issue entry first.
6Pass the CRR entry: debit general reserve, profit and loss or other free reserve; credit Capital Redemption Reserve.
7If expenses are given, debit the Statement of Profit and Loss and credit bank.
8Check that the buyback account is nil and that the free reserves have not gone negative. Then prepare the balance sheet extract if asked.

Quickest way: Three-line buyback entry method

When to use it: Use this when you have limited time, both for MCQs and for journal entry questions of 5 to 10 marks.

Write the three standard entries as a template: (1) Buyback A/c Dr, To Bank; (2) Share Capital Dr, Premium source Dr, To Buyback A/c; (3) Free reserve Dr, To CRR.
Fill in the amounts in order: total price, then nominal and premium, then CRR. Cross-check that debits in entry 2 equal the credit.
In MCQs, work out the CRR first. It is usually nominal value, less any fresh issue at face value. Then check which option has that number.
In written answers, show the working notes for premium and CRR separately. Examiners give step marks for each working even if a later figure goes wrong.
Label each entry with narration, such as 'Being buyback of shares at premium'.

Common mistakes in Accounting Entries for Buyback and Capital Redemption Reserve

Forgetting to create CRR
Students stop after cancelling the share capital and premium, and treat the buyback as finished.
Fix: Make CRR the final step in your template. Before finishing, ask: did I transfer the nominal value to CRR?
Creating CRR on the total price instead of nominal value
Students confuse the amount paid with the amount of capital cancelled.
Fix: CRR is linked to nominal value only, never to the premium. Compute nominal value × number of shares.
Ignoring the fresh issue when computing CRR
Students see the CRR rule and apply it mechanically even when part of the buyback is funded by a fresh issue.
Fix: Deduct the face value of proceeds of the fresh issue of a different kind of shares from the nominal value bought back. The balance is CRR.
Debiting the premium to the Statement of Profit and Loss as an expense
Students treat the premium like a cost.
Fix: The premium is charged to securities premium or free reserves, as directed. Only buyback expenses go to the Statement of Profit and Loss.
Using securities premium for CRR or using more than its balance
Students read 'out of securities premium' as covering both premium and CRR.
Fix: Securities premium can absorb the premium payable on buyback, up to its balance. The CRR transfer is made from free reserves or profits, so check both balances.
Crediting Bank directly in the share capital entry and skipping the buyback account
Students shorten the entry to save time, then lose the link between payment and cancellation.
Fix: A single compound entry is acceptable if the question allows it, but showing the buyback account is clearer and safer for step marks.

Worked examples

Example 1

A Ltd bought back 10,000 fully paid equity shares of ₹10 each at ₹15 per share. The company has general reserve of ₹2,00,000 and securities premium of ₹30,000. The buyback is made out of securities premium and general reserve. Pass the journal entries.

Show the solution

Total consideration = 10,000 × ₹15 = ₹1,50,000.
Nominal value bought back = 10,000 × ₹10 = ₹1,00,000.
Premium = ₹1,50,000 − ₹1,00,000 = ₹50,000. Securities premium absorbs ₹30,000 and the balance ₹20,000 comes from general reserve.
Entry 1: Buyback of Equity Shares A/c Dr ₹1,50,000; To Bank A/c ₹1,50,000.
Entry 2: Equity Share Capital A/c Dr ₹1,00,000; Securities Premium A/c Dr ₹30,000; General Reserve A/c Dr ₹20,000; To Buyback of Equity Shares A/c ₹1,50,000.
No fresh issue, so CRR = ₹1,00,000.
Entry 3: General Reserve A/c Dr ₹1,00,000; To Capital Redemption Reserve A/c ₹1,00,000.
Check: general reserve used = ₹20,000 + ₹1,00,000 = ₹1,20,000, which is less than ₹2,00,000. The balance of general reserve is ₹80,000.

Answer: Cash paid ₹1,50,000. Equity capital reduced by ₹1,00,000. Securities premium is nil after charging ₹30,000. General reserve falls to ₹80,000. CRR created is ₹1,00,000.

Example 2

B Ltd bought back 5,000 fully paid equity shares of ₹10 each at ₹12 per share. To fund part of the buyback, it first issued 2,000 10% preference shares of ₹10 each at par, fully paid. Securities premium has a balance of ₹25,000 and the profit and loss balance is ₹1,00,000. Premium on buyback is charged to securities premium. Pass the entries.

Show the solution

Fresh issue proceeds = 2,000 × ₹10 = ₹20,000.
Entry 1: Bank A/c Dr ₹20,000; To 10% Preference Share Capital A/c ₹20,000.
Total buyback price = 5,000 × ₹12 = ₹60,000. Nominal value = 5,000 × ₹10 = ₹50,000. Premium = ₹10,000.
Entry 2: Buyback of Equity Shares A/c Dr ₹60,000; To Bank A/c ₹60,000.
Entry 3: Equity Share Capital A/c Dr ₹50,000; Securities Premium A/c Dr ₹10,000; To Buyback of Equity Shares A/c ₹60,000.
CRR = nominal value bought back ₹50,000 − fresh issue proceeds ₹20,000 = ₹30,000.
Entry 4: Statement of Profit and Loss (balance) A/c Dr ₹30,000; To Capital Redemption Reserve A/c ₹30,000.
Check: securities premium goes from ₹25,000 to ₹15,000 and the profit and loss balance goes from ₹1,00,000 to ₹70,000.

Answer: CRR created is ₹30,000, transferred from profit and loss. Securities premium is reduced by ₹10,000. Equity capital is reduced by ₹50,000 and preference capital rises by ₹20,000.

Exam tips

Always show working notes for premium and CRR. Step marks are awarded even if the final balance goes wrong.
Check whether the question says 'out of free reserves', 'out of securities premium' or 'out of fresh issue'. Each changes the CRR figure or the debit side.
Read for a fresh issue of a different kind of shares. If one exists, CRR is reduced by the face value of its proceeds.
Pass the fresh issue entry first, then the buyback entries, then the CRR entry. This order matches the logic of the transactions.
In MCQs, compute CRR first. Most options differ in whether the premium or the fresh issue was handled correctly.

Practice questions from Buyback of Securities

Accounting Entries for Buyback and Capital Redemption Reserve in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Accounting Entries for Buyback and Capital Redemption Reserve: frequently asked questions

Why is Capital Redemption Reserve created in a buyback?

The cash leaving the company reduces its capital. Section 69 requires that a sum equal to the nominal value of shares bought back be transferred to CRR when the buyback is out of free reserves or securities premium. This keeps the capital base protected.

Can securities premium be used to pay the premium on buyback?

Yes, the securities premium account can be used to meet the premium payable on buyback, to the extent of its balance. Any remaining premium is charged to free reserves. The CRR transfer is still made from free reserves or profits.

What is CRR used for after the buyback?

CRR can be used only to issue fully paid bonus shares to members. It cannot be distributed as dividend. It appears under Reserves and Surplus in the balance sheet.

Is CRR needed if the buyback is funded by a fresh issue of shares?

CRR is not needed on the part funded by the proceeds of a fresh issue of shares or other specified securities, which must be of a different kind. You compute CRR as nominal value bought back minus the face value of those proceeds.