How is treasury stock recorded in financial accounts?

Treasury stock is recorded as a deduction from total equity on the balance sheet because it represents shares that the company has repurchased from shareholders. When a company buys back its own shares, those shares are no longer outstanding and are not considered an asset. Instead, they are treated as a contra-equity account, effectively reducing the total equity available to shareholders.

By deducting the cost of treasury stock from total equity, it reflects a true picture of the equity that is available to external stakeholders. This approach also signifies that the company has used its resources to buy its own shares, which can affect the overall financial stability and liquidity of the company. The treatment of treasury stock in this manner helps users of financial statements understand the impact of share repurchases on shareholder equity.