What is Capital Surplus?
In the USA, capital surplus represents the difference between the par value of a company’s issued shares and the actual issue price received when these shares are sold. Essentially, it’s additional paid-in capital over and above the nominal value of the shares, also known as share premium in the UK. It is reported as part of equity on the balance sheet and plays a crucial role in a company’s financial structure.
Key Concepts
- Par Value: This is the face value of a share, often set at a minimal amount by the company.
- Issue Price: This is the amount at which the share is actually sold to investors.
- Capital Surplus: This represents the additional amount received over the par value.
Examples
- Example 1: If a company issues shares with a par value of $1 but sells them at $5 per share, the capital surplus per share is $4.
- Example 2: A company issues 1,000 shares with a par value of $2 each and sells them at $6 each. The total capital surplus is ($6 - $2) * 1,000 = $4,000.
- Example 3: A corporation issues shares with no par value at $20 each. The entire $20 is recorded as additional paid-in capital or capital surplus.
Frequently Asked Questions
What is the purpose of capital surplus?
Capital surplus provides companies with financial padding or reserves. This money can be used for future investment, debt reduction, or any unforeseen expenditures.
How is capital surplus different from retained earnings?
Capital surplus arises from the issuance of shares at a price above par value, whereas retained earnings are profits that a company has earned and retained over time after dividends are paid out.
Can capital surplus be distributed as dividends?
Typically, capital surplus is not meant for distribution as dividends. It is usually reserved for reinvestment or other financial activities beneficial to the company’s longevity.
How is capital surplus reported on financial statements?
Capital surplus is reported under shareholders’ equity on the company’s balance sheet, separate from retained earnings.
Is capital surplus taxed?
In general, the amount received as capital surplus is not subjected to corporate income taxes. However, this may vary depending on local tax laws.
Related Terms
- Par Value: The nominal value of a share as set by the issuing company.
- Issue Price: The actual selling price of a share in the market.
- Share Premium: Term equivalent to capital surplus used in the UK.
- Equity: The owner’s interest in the assets of a corporation after liabilities are deducted.
- Additional Paid-in Capital (APIC): Another term used to refer to capital surplus.
Online Resources
Suggested Books for Further Study
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
- “Financial Accounting: An Introduction to Concepts, Methods and Uses” by Roman L. Weil, Katherine Schipper, and Jennifer Francis
- “Corporate Finance” by Stephen A. Ross, Randolph W. Westerfield, and Jeffrey Jaffe
Accounting Basics: “Capital Surplus” Fundamentals Quiz
Thank you for exploring the concept of capital surplus with us. Happy learning and keep enhancing your accounting acumen!
