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What is Capital Surplus?

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  • Written By: Mary McMahon
  • Edited By: Kristen Osborne
  • Last Modified Date: 18 November 2016
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    Conjecture Corporation
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Capital surplus is a form of equity in a company that comes from sources other than retained earnings and capital stock. It is recorded on balance sheets under a separate entry so that the company, shareholders, and other interested parties can see how much of the company's equity is held in the form of capital surplus. Several other terms are used to refer to this accounting concept, including acquired surplus, paid-in surplus, share premium, donated surplus, and additional paid-in capital.

The most common way that a company acquires a capital surplus is by selling stock on the primary market above par value. When companies sell their stock on the primary market in an initial public offering, the proceeds of the sale go directly to the company, in contrast with sales on the secondary market where people sell shares to each other. The par value is an arbitrary value determined for the stock at the time of the offering.

When stocks are sold at par value, they are recorded on the balance sheet as capital stock. Shareholders who have purchased stock have equity in the company and the value of that equity is reflected in this accounting entry. If a company sells a stock above par value, the excess sale proceeds are recorded as capital surplus while the rest of the sale is recorded as capital stock. Not all stocks have a set par value.

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There are other ways for a company to end up with capital surplus. Acquiring a company with a capital surplus is one method. Buying stock back and reselling it is another way, as is receiving donated stock. Significant events in a company's fiscal year tend to be announced at press releases and in company publications for the benefit of members of the public and the outcomes of these events can be seen recorded on the balance sheet.

Keeping track of shareholder's equity and other important financial information is required by law in many regions of the world. Companies must follow standardized accounting procedures to record accounting entries and they must make certain information available to the public if they are publicly traded. Government regulators also have the ability to inspect and review finances to confirm that a company is operating within the law, that its public filings are accurate, and that there are no glaring problems with the company's finances or the way it maintains its records.

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allenJo
Post 3

@miriam98 - Actually, I don’t think the average investor will know the par value of the stock.

My understanding is that this has always just been a bookkeeping value, bearing little relation to the market value of the stock.

The company knows this information; I don’t think that it has any other purpose besides appearing as a line item in the capital surplus balance sheet when the company uses it to create a capital surplus scenario.

miriam98
Post 2

@NathanG - How do I determine the par value of the stock so I can know if I should buy it at a certain amount?

NathanG
Post 1

The company I used to work for saw their stock tank to where it was less than $1 per share. When a stock is this low, it can be a good thing or a bad thing.

Just because it’s cheap doesn’t mean it’s a good buy. Well, apparently a bunch of executive officers in the company began buying up huge lots of shares at this price level. Apparently they thought their company was a very good buy, and undervalued.

Three years later the stock price was at $5.60 and I noticed that some of those executives sold off shares, thus creating a capital surplus. I only wish I had been that smart.

When I see a stock that cheap, I don’t know whether it’s a buying opportunity or a signal that things are about to get worse. Of course, this was about the time they laid me off, so I probably wouldn’t have invested anyway.

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