The total certificates outstanding, as shown by the stock certificate book and stock register, should agree with the Capital Stock account, unless unpaid subscriptions exist. The details of checking these accounts are the same as in all other corporations and need not be enlarged upon here. The existence of treasury stock should be proved, not by certificates pasted in the book, but by new certificates which should be filed with the other securities of the concern.
In the case of a company which habitually acquires treasury stock by purchase or exchange, careful examination should be made of all entries relating to such transactions; and it should never be forgotten that gains arising from this source do not necessarily form a part of the profits from the business of the company. In such transactions the price is not always par, and confusion frequently arises in this connection. The correct rule is that, whatever price is paid, Treasury Stock account should be debited with the par value of the stock. The difference between Capital Stock and Treasury Stock will then, and only then, show the amount of capital stock outstanding and subject to dividends. The profit or loss resulting from such operations should be carried to a Reserve or Surplus account, rather than to the Profit and Loss account.