What effect do treasury shares have on shareholders' equity?

Treasury shares are shares that have been repurchased by the company and are held in the company's treasury, rather than being retired or cancelled. These shares do not have voting rights and do not pay dividends, impacting how they are reported on the balance sheet.

When treasury shares are accounted for, they are recorded as a reduction to shareholders' equity, which reflects the fact that the company has effectively bought back its own stock. As a result, the total amount of shareholders' equity decreases by the cost of the treasury shares. This reduction is significant because it represents funds that are no longer available for distribution to shareholders as dividends or for reinvestment in the business.

In summary, the reduction in shareholders' equity caused by treasury shares highlights how these transactions impact a company’s financial health and shareholder returns.