When a company repurchases its own shares and immediately retires those shares (cancelling the shares and removing them from circulation), this reduces the number of shares issued and outstanding.
So what's the journal entry? It depends on whether the repurchase price is higher or lower than the original issue price of the shares.
If the repurchase price is LOWER than the original issue price of the shares, then the company (1) decreases the common stock and additional paidin capital accounts, (2) decreases the cash account, and (3) credits an account called "paidin capital share repurchase" to make the total debits equal the total credits (so the journal entry balances).
If the repurchase price is HIGHER than the original issue price of the shares, then the company (1) decreases the common stock and additional paidin capital accounts, (2) decreases the cash account, and (3) reduces the retained earnings account (but first reduces the "paidin capital share repurchase" account if that account has a balance).
The main difference between these two scenarios is that in one case, the "paidin capital share repurchase" account is credited to make the journal entry balance while in the other case the retained earnings account is debited to make the journal entry balance.
The accounting approach outlined in this video is sometimes called the "constructive retirement method."
In no case does the company record a gain or a loss, as these transactions only affect balance sheet accounts.
—
Edspira is the creation of Michael McLaughlin, an awardwinning professor who went from teenage homelessness to a PhD. Edspira’s mission is to make a highquality business education freely available to the world.
—
SUBSCRIBE FOR A FREE 53PAGE GUIDE TO THE FINANCIAL STATEMENTS, PLUS:
• A 23PAGE GUIDE TO MANAGERIAL ACCOUNTING
• A 44PAGE GUIDE TO U.S. TAXATION
• A 75PAGE GUIDE TO FINANCIAL STATEMENT ANALYSIS
• MANY MORE FREE PDF GUIDES AND SPREADSHEETS
* http://eepurl.com/dIaa5z
—
SUPPORT EDSPIRA ON PATREON
* / prof_mclaughlin
—
GET CERTIFIED IN FINANCIAL STATEMENT ANALYSIS, IFRS 16, AND ASSETLIABILITY MANAGEMENT
* https://edspira.thinkific.com
—
LISTEN TO THE SCHEME PODCAST
* Apple Podcasts: https://podcasts.apple.com/us/podcast...
* Spotify: https://open.spotify.com/show/4WaNTqV...
* Website: https://www.edspira.com/podcast2/
—
GET TAX TIPS ON TIKTOK
* / prof_mclaughlin
—
ACCESS INDEX OF VIDEOS
* https://www.edspira.com/index
—
CONNECT WITH EDSPIRA
* Facebook: / edspira
* Instagram: / edspiradotcom
* LinkedIn: / edspira
—
CONNECT WITH MICHAEL
* Twitter: / prof_mclaughlin
* LinkedIn: / profmichaelmclaughlin
—
ABOUT EDSPIRA AND ITS CREATOR
* https://www.edspira.com/about/
* https://michaelmclaughlin.com