What is capital surplus?

Capital surplus is extra money a company has. This money is not from the normal business of the company. There are a few ways a company can get capital surplus:

Selling stock for more than par value

Companies can sell shares of their stock. Each share has a “par value”. This is the lowest price the stock can be sold for. If the company sells the stock for more than the par value, the extra money is capital surplus.

For example, let’s say a company’s stock has a par value of $1. The company sells the stock for $10. The extra $9 is capital surplus.

Selling treasury stock

Sometimes a company will buy back its own stock. This stock is called “treasury stock”. If the company later sells this treasury stock, the money they get is capital surplus.

Lowering par value

A company can decide to lower the par value of its stock. If they do this, the difference between the old par value and the new par value becomes capital surplus.

For example, let’s say a company’s stock has a par value of $10. The company lowers the par value to $5. The $5 difference becomes capital surplus for each share.

Buying another company

If a company buys another company, and that other company already has capital surplus, the buying company gets that capital surplus too.

How capital surplus is different from other types of capital

Capital surplus is different from some other types of money a company might have:

Paid-in capital

Paid-in capital is money a company gets when it first sells stock. Capital surplus is extra money on top of paid-in capital.

Retained earnings

Retained earnings is money a company makes from its normal business and keeps to use later. Capital surplus does not come from the company’s normal business.

Why capital surplus matters

Capital surplus is important for a few reasons:

It’s extra money for the company

Capital surplus gives a company more money to work with. The company can use this money to grow the business.

It affects the company’s book value

A company’s “book value” is the total value of the company’s assets. Capital surplus is counted as part of a company’s assets, so it increases the company’s book value.

It’s taxed differently

In some countries, capital surplus is taxed differently than other types of income. This can save the company money on taxes.

How accountants deal with capital surplus

Accountants have special ways of tracking capital surplus:

It’s reported on the balance sheet

A company’s balance sheet shows what the company owns (its assets) and what it owes (its liabilities). Capital surplus is reported on the balance sheet as part of the company’s assets.

It’s separate from other types of capital

Accountants keep capital surplus separate from paid-in capital and retained earnings. Each of these has its own line on the balance sheet.

It’s not part of net income

Capital surplus is not counted as part of a company’s net income (profit). Net income only includes money from the company’s normal business.