Definitions

Capital surplus

Capital surplus

Capital surplus is an accounting term which frequently appears as a balance sheet item as a component of shareholders' equity. Capital surplus is used to account for any funds the issuing firm has received over and above the par value of the common stock. It may also be used to account for any gains the firm may derive from selling treasury stock, although this is less commonly seen.

Taken together, common stock issued and paid plus capital surplus represent the total amount actually paid by investors for shares when issued (assuming no subsequent adjustments or changes).

Shares for which there is no par value will generally not have any form of capital surplus on the balance sheet; all funds from issuing shares will be credited to common stock issued.

Some other scenarios of causing Capital Surplus include Government donate a piece of land to the company.

Capital Surplus is also a term used by economists to denote capital inflows in excess of capital outflows on a country's balance of payments.

Background

Many firms issue shares with some nominal par value, often the smallest unit of currency commonly in use (such as one penny or $0.01), in many jurisdictions due to legal requirements. The firm may then sell these shares for a much higher price (as the par value is a largely archaic and fictional concept).

Any premium received over the par value is credited to capital surplus.

Example

A firm is established and created with 100 shares with a par value of $0.01. These shares are bought by investors for $1 each.

The firm's balance sheet at this point consists of only three items:

Assets:

Cash $100
Liabilities:
Nil
Shareholders' equity:
Common stock $1
Capital surplus $99

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