2) What is stock?

In accounting there are two common uses of the term stock. One meaning of stock refers to the goods on hand which is to be sold to customers. In that situation, stock means inventory.

The term stock is also used to mean the ownership shares of a corporation. For example, an owner of a corporation will have a stock certificate which provides evidence of his or her ownership of a corporation’s common stock or preferred stock. The owner of the corporation’s common or preferred stock is known as a stockholder.

3) What are the stockholders’ equity accounts?

The stockholders’ equity accounts are balance sheet accounts and a part of the accounting equation Assets = Liabilities + Stockholders’ Equity. In this light you can view the stockholders’ equity accounts (along with the liability accounts) as sources of the amounts reported in the asset accounts.

If the source of an asset was an investor purchasing new shares of common stock, the corporation would credit the stockholders’ equity account Common Stock and perhaps Paid-in Capital in Excess of Par–Common Stock, or Premium on Common Stock. If the source of an asset was an investor purchasing new shares of preferred stock, the corporation would credit the stockholders’ equity account Preferred Stock and perhaps Paid-in Capital in Excess of Par–Preferred Stock, or Premium on Preferred Stock.

If the source of an asset was the net income earned by the corporation, the stockholders’ equity account Retained Earnings would be credited. If a corporation reduces its assets by purchasing its stock from its stockholders, the contra-stockholders’ equity account Treasury Stock is debited.

4) Treasury Stock — Cost Method

When treasury shares are later reissued, the treasury stock account is credited for the cost at which they were purchased, cash account is debited for the amount actually received and if the amount received on reissuance of treasury stock is:

• more than the cost of treasury stock, the difference between the amount received and the cost of the treasury stock is credited to additional paid-in capital.

• less than the cost of treasury stock, the excess of cost of treasury stock over the amount received is debited to discount on capital account.

The following example illustrates the cost method of accounting for treasury stock:

Example

A company issued 10,000 shares of common stock of $5 par value and received $53,000 cash. The company then purchased back 900 shares out of those at $6 per share. The company then resold 500 shares from treasury stock at $6.50 per share.

Pass journal entries to record the above transactions.

Solution

Issuance of Common Stock:

Cash	53,000
Common Stock		50,000
Additional Paid-In Capital		3,000

Purchase of Treasury Stock (Cost Method):

Treasury Stock	5,400
Cash		5,400

Resale of Treasury Stock (Cost Method):

Cash	3,250
Treasury Stock		3,000
Additional Paid-In Capital		250