In determining total equity, which item reduces the equity balance?

In determining total equity, which item reduces the equity balance?

• A. Treasury stock
• B. Common stock
• C. Additional paid-in capital
• D. Cash

Answer: (A)

When calculating total equity, you combine amounts that increase equity with those that decrease it. Treasury stock is the one that decreases equity. It represents shares the company bought back and is recorded as a contra-equity account with a debit balance, which reduces the overall equity on the balance sheet. Common stock and additional paid-in capital both increase equity, since they reflect funds raised from shareholders. Cash is an asset, so while using cash to buy treasury stock affects both assets and the equity account, the item that directly reduces the equity balance is the treasury stock itself.

When calculating total equity, you combine amounts that increase equity with those that decrease it. Treasury stock is the one that decreases equity. It represents shares the company bought back and is recorded as a contra-equity account with a debit balance, which reduces the overall equity on the balance sheet.

Common stock and additional paid-in capital both increase equity, since they reflect funds raised from shareholders. Cash is an asset, so while using cash to buy treasury stock affects both assets and the equity account, the item that directly reduces the equity balance is the treasury stock itself.