What is the treatment of treasury shares when a company reacquires its own shares?

When a company reacquires its own shares, commonly referred to as treasury shares, these shares are deducted from equity on the balance sheet. This treatment reflects the fact that treasury shares represent a reduction in the total equity of the company since they are effectively shares that have been bought back and are no longer considered outstanding shares. By deducting the cost of treasury shares from equity, the financial statements provide a clearer picture of the company's net equity position.

This approach is consistent with the accounting principles that treat treasury shares as a contrarian to shareholder equity. Unlike expenses, which would affect the income statement and subsequently retained earnings, treasury shares do not represent a loss of value but rather a reduction of the share capital that has been issued. Therefore, it impacts the equity section directly rather than being recorded as an expense or liability. This is why the correct treatment is to deduct treasury shares from equity.