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Balance sheet

kulwant singh (secretary) (31 Points)

07 November 2016

I am doing MBA in finance. Can someone help me on the query of balance sheet. I am not able to understand why we deduct stock holder equity from treasury stock.

Please do the needful.

Regards

Kulwant

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3 Replies

Shobhit Jain (CA) (4892 Points)
Replied 07 November 2016

Treasury stock (treasury shares) are the portion of shares that a company keeps in its own treasury. Treasury stock may have come from a repurchase or buyback from shareholders, or it may have never been issued to the public in the first place.

A corporation may choose to reacquire some of its outstanding stock from its shareholders when it has a large amount of idle cash and, in the opinion of its directors, the market price of its stock is too low. If a corporation reacquires a significant amount of its own stock, the corporation's earnings per share may increase because there are fewer shares outstanding.

If a corporation reacquires some of its stock and does not retire those shares, the shares are called treasury stock. Treasury stock reflects the difference between the number of shares issued and the number of sharesoutstanding. When a corporation holds treasury stock, a debit balance exists in the general ledger account Treasury Stock (a contra stockholders' equity account). There are two methods of recording treasury stock: (1) the cost method, and (2) the par value method.

Under the cost method, the cost of the shares acquired is debited to the account Treasury Stock. For example, if a corporation acquires 100 shares of its stock at $20 each, the following entry is made: