 Treasury stock is not a third kind of stock. It is a company's own common stock that it has reacquired. There are a number of reasons why a company might repurchase its own common stock. A few reasons are listed here on the slide and include signaling the market that they think that the stock is a good value. Or they might need shares of stock for employee compensation plans. And potentially to try to prevent takeover bids from corporate raiders. Treasury stock is not an asset account. It is a contra equity account. It has a normal debit balance and its companion account is usually common stock. Because it has a debit balance, it reduces equity. In order to see how a treasury stock impacts equity, let's look at an example from Mumford & Sons. You can see the company's paying capital amounts as well as retained earnings. Let's see how these change with the purchase and resale of treasury stock. In this example, Mumford & Sons purchases 10,000 shares of its common stock for $10 per share. So we would debit treasury stock and credit cash for $100,000. Treasury stock is always accounted for at its cost. So the cost of these shares is now $10 per share. The stock holder's equity section after the purchase looks like this. Notice treasury stock is listed after retained earnings and is a reduction in equity. When Mumford & Sons reissues its stock back to the market, there are three possible outcomes. It can sell it at cost, above cost, or below cost. Let's look at an example of each. In this example, Mumford & Sons reissues 2,000 shares of its treasury stock at $10 per share, its cost. So we would debit cash and credit treasury stock for $20,000. The stock holder's equity section after the reissuance would look like this. Notice that treasury stock is now 20,000 less and equity has increased by 20,000 because of it. In this example, Mumford & Sons reissues 4,000 shares of its treasury stock at $12 per share, which is above cost. So we would debit cash for $48,000 and credit treasury stock for $40,000, its cost. We would also credit paid-in capital for treasury stock for $8,000. This is the amount we reissued the stock above its cost. The stock holder's equity section after the reissuance looks like this. Notice that paid-in capital for treasury stock is listed in the paid-in capital section. And treasury stock has been reduced by another $40,000 and equity has increased by $48,000. Finally, treasury stock can be reissued below cost if a company needs cash or thinks the stock price will drop even further. In this extreme example, Mumford & Sons reissues 4,000 shares of its treasury stock for $5 per share, which is $5 below its cost. So I want to show you the journal entry in stages. We would debit cash for $20,000 and credit treasury stock for $40,000, its cost. This leaves us missing $20,000 of debits. When this happens, the first account we reduce is paid-in capital for treasury stock. However, we can only debit this account for its available balance, which in this case is $8,000. When there isn't enough balance available in the paid-in capital for treasury stock account, the remaining amount needs to come from retained earnings. So retained earnings needs to be debited $12,000 to make the journal entry balance. The stock holder's equity section after all of these transactions is shown here. Treasury stock is gone because all of the stock was reissued. Paid-in capital for treasury stock is gone because we used that available balance when we sold the stock below cost. And finally, retained earnings has decreased by $12,000 to cover the amount needed when the stock was sold below cost.