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What Is a Contributed Surplus?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 05 September 2016
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    Conjecture Corporation
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"Contributed surplus" is a term that has to do with income of a business that is not realized from the profits associated with the business operation itself. Identifying certain income as being this type of surplus makes it easier to determine how much of the net profits are realized by the actual business operation and what income is the result of ancillary activities that are considered non-operational in nature. The ability to make this type of differentiation can go a long way toward avoiding a false image of the actual efficiency of the operation, especially if the business is mainly continuing to operate on the basis of an influx of non-operational income.

The forms of income that are part of contributed surplus will vary somewhat from one company model to the next. One of the core questions to ask in regard to any source of income is whether or not the revenue is the result of the operational efforts of the business or if the income has to do with some other measure taken by business owners and managers, such as the issuance of shares of stock, returns from investments made on behalf of the company, or similar sources. If the income in question is not connected with the operational aspects of the business, there is a good chance it can be properly classed as contributed surplus.

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One of the easiest ways to determine the amount of contributed surplus is to segregate all profits that are earned from the sales of goods and services that have to do with core operation of the business from other sources of income that have nothing to do with that core process. For example, contributed surplus is realized when a company is able to issue new shares of stock and sell those shares at a rate that is above and beyond the par value of the company’s stock. This is because that difference is not connected with the operational income generated by the business in any manner.

Determining what income sources constitute contributed surplus is very important to the task of accurately assessing the future prospects of a business. By identifying profits that are not considered due to operational income, company owners and investors can more easily evaluate how well the business is doing in terms of generating sales and in managing the operational expenses that are incurred as part of the production or other processes that are part of the company’s permanent structure. This opens the door for possibly amending those processes to increase productivity and efficiency, as well as generate additional sales. When the contributed surplus is not segregated from the operational income, this can lead to a false impression that the operation is working very well and is not in need of some sort of improvement. Over time, lack of improvements may lead to increased operational costs, less profits from sales, and the eventual failure of the business.

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