 In this discussion we will discuss the discussion question of describe treasury stock. So if we see an essay question like this or a discussion question like this we may first want to identify the type of entity for which treasury stock would be applicable and we are again the key here is we're talking about stock and therefore we're talking about a corporation. Note that if we're in a course or in a chapter where we're dealing with corporations of course we would just assume we're talking about corporations but if we see this type of questions in these types of things just in general for accounting questions as a whole then it's important for us to distinguish what type of entity we're talking about when it is applicable. There's gonna be a lot of things that'll be the same from entity to entity some will differ and we need to be able to recognize those types of questions that are clearly focusing in on those areas that differ. We hear focusing in on corporations are focusing solely mostly on the areas that differ so treasury stock will be a form of stock so it's going to be related to a corporation stocks being a form of ownership for a corporate type of entity not so for a sole proprietor or a partnership. So first we kind of want to decide okay what is treasury stock maybe compare and contrast it to a typical type of stock a common stock and then discuss what you know how would it be recorded possibly what does it do to the equity section and why might a company want to do it. So treasury stocks just basically represents and this is one of the most confusing concepts of a corporation or type of stock doesn't happen all the time and that's why it's a little confusing as well but it would be the corporation is in essence purchasing their own stock back off of the stock market. In other words we are reacquiring our stock so if we think it's something like Google or something that has you know stocks that they issued on the stock market anybody can buy and sell stocks on the stock market from other traders so if whenever we go on the market if we buy Google stock we're not buying from the company typically we're buying from other people trading stocks. Now the corporation itself can go back into the stock market and buy stocks back from other traders themselves so they're rebuying their own shares that they had previously issued onto the market. So that's going to be a treasury stock it's a bit confusing to buy our own shares. Now how does that differ of course from from a common stock holder well a common stock typically you know is out there if those common stocks out there from a common stock holder well then I'm a separate individual I'm not the company I'm an owner of the company I'm a shareholder of the company. A treasury stock it has been reacquired by the company itself remember that the company has kind of individual rights and can own things and basically it's kind of like buying back its own shares it owns kind of itself there so it's a little bit unusual how would we record that well it's just like the cash would be just like any other transaction someone would own the stock they would be selling it for the market price if someone owned Google stock they would be selling it for whatever Google's trading for on the market the corporation would go in and buy the stock from them and that would mean cash would go down for the corporation so it'd be a credit to cash cash decreasing and then we would debit something and if it was some other stock that we were buying like if Google was buying Apple stock for whatever reason for an investment purpose then it would be a debit to an asset for the stock for the investment that was purchased in this case it'll still be a debit but it's not going to go to an asset account it's going to go to an equity account so that's going to be the difference in the recording so the debit then we're paying cash we're debiting something but we're not going to debit an asset because we're buying our own self so it's going to go into the equity section which represents kind of the book value of the corporation and that means if we debited the equity section remember as a credit balance credits will win it's a credit normal balance section if we debit the equity section then we're doing the opposite thing to it we're actually decreasing we're lowering the equity section so which kind of makes sense because we paid cash so we're lowering the equity section so for accounting equation assets equal liabilities plus equity cash is going down equity section going down no effect on net income however now why might a company do that that's a kind of again it's kind of an unusual thing to do that why why would a company do that well one you can think about the effect of this happening if we buy our own stocks off the market say there's a hundred shares out there of our stock on the market and then we buy back you know 20 20 shares of them on the market well now there's only 80 shares out there on the market that are currently trading between other people other people are trading these stocks between themselves and we just took 20 shares off the market well that would mean that the outstanding shares the ones that are still trading between other folks should you would think go up in value so we may for whatever reason want to actually increase the price of the shares that are currently out there how could we do that we can lessen the amount of shares that are out there by buying back our own shares so we might be trying to find some optimal price for the market again it doesn't have anything to do with our financial statements because you know our we haven't we haven't done anything to our our value other than pay cash for the stocks but you know we haven't we haven't generated any more revenue or anything like that we just bought back our own shares so that the shares that are still out there still represent the total company but now there's less of them and therefore because of supply and demand you would think that the stock price of the remaining shares could possibly increase they might also be trying to do some strategic strategy like trying to avoid a hostile takeover or something like that or they may want to have more shares that are there that on stock so that they can issue them in some kind of employee agreement they might want to give some of these stocks out to employees as some type of incentive program and typically if we give employees stock it might give them more incentive to do well in the business we might want to pay them with stocks in some ways to give them incentive to to invest their time more efficiently and be more invested in the company