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Balance Sheet: Stockholder’s Section

In: Business and Management

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Treasury Stock

Treasury stock is the amount of shares that a company keeps. They can come from a repurchase or buyback from shareholders. Treasury stock does not pay dividends, there are no voting rights attached, and should not be included in the outstanding share calculations. A company making a public offering usually creates treasury stock. Not all shares are approved for sale. Some shares are held back and used to create extra cash later. Another reason some shares are held back is to ensure controlling interest. Treasury stocks are created when a company does a buyback. This is beneficial to shareholders because it lowers the number of outstanding shares located in the shareholder equity section of the balance sheet, often seen as a negative number there. The company debits Treasury Stock and credit Cash. Cash paid to buyback stock is recorded in the contra-equity account.

Stock Splits

A stock split is the number of outstanding shares of stock increased; with no impact on any of the equity account balances. The increases in the number of stock will decrease the market price. Companies do this to keep shares at a reasonable price and attract potential investors. No accounting entry is necessary when a stock split occurs. Stock splits do not dilute the ownership interests of existing shareholders. Reverse stock splits can occur when the company reduces the number of shares outstanding. A memorandum note is enter to indicate the change in shares and changes in par value.

Retained Earnings

Retained earnings do not represent surplus cash left over after payment of dividends. It demonstrates what the company did with their profits; the amount of profit reinvested in the business since the company started. The profits reinvested are assets purchases or liabilities. Retained earnings sometimes reflect the dividend policy by the decision to reinvest

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