Treasury Stock

[Hanuman]

Stock Holder Equity: (common stock at par + capital in excess of par - treasury stock + retained earnings - accumulated other comprehensive loss)

Why do we subtract treasury stock from stock holders equity? Where is the treasury stock represented on the balance sheet?

[chadsandstedt]

Think of treasury stock as a sort of dividend. Cash was paid out to some of the shareholders who opted to sell. Equity is reduced because you used cash to buy the company’s shares. Since assets were reduced then equity must be reduced as well.

[Hanuman]

@chad.sandstedt

Think of treasury stock as a sort of dividend. Cash was paid out to some of the shareholders who opted to sell. Equity is reduced because you used cash to buy the company’s shares. Since assets were reduced then equity must be reduced as well.

Thanks for the reply. Treasury stocks are the repurchased stocks or ESOP. So wouldn’t it be transfer of wealth? from cash to stocks. But if we subtract it from shareholders equity that means are we representing Treasury stock separately.(Neither as asset nor as equity). Is this correct?

[S2000magician]

@Hanuman

@chad.sandstedt

Think of treasury stock as a sort of dividend. Cash was paid out to some of the shareholders who opted to sell. Equity is reduced because you used cash to buy the company’s shares. Since assets were reduced then equity must be reduced as well.

Thanks for the reply. Treasury stocks are the repurchased stocks or ESOP.

Repurchased stock.

@Hanuman

So wouldn’t it be transfer of wealth? from cash to stocks.

It is a transfer of wealth: cash from the company to the shareholders.

@Hanuman

But if we subtract it from shareholders equity that means are we representing Treasury stock separately.(Neither as asset nor as equity).

Technically, it’s known as contra equity: it’s an equity account that has a debit balance (whereas equity accounts normally have credit balances). It reduces shareholders’ equity.