Definition
In finance and corporate accounting, ‘surplus’ refers to any excess amount over what is needed or allocated. Specifically, in corporate financial statements, it is the amount remaining after all liabilities, debts, and capital stock have been deducted from the total assets. Surplus often indicates the positive financial health of an entity, showing that assets exceed liabilities.
Examples
- Corporation A: Suppose Corporation A has total assets worth $500,000, total liabilities amounting to $300,000, and the capital stock is valued at $100,000. The surplus in this case would be calculated as follows:
\[
\text{Surplus} = $500,000 - $300,000 - $100,000 = $100,000
\]
- Budgetary Surplus: A government or institution that spends $400,000 out of a budget of $500,000 has a surplus of $100,000.
Frequently Asked Questions
Q: What is the difference between surplus and profit?
A: Surplus refers to the excess of total assets over total liabilities, often after deducting capital stock. Profit, on the other hand, refers to earnings gained from business operations after all expenses have been subtracted from revenues.
Q: Can a company have a surplus but show a loss on its income statement?
A: Yes, a company can have a surplus if its assets exceed its liabilities, despite recording a loss on its income statement due to operational deficits or extraordinary expenses.
Q: Is surplus always a positive indicator?
A: Generally, surplus is a positive indicator of financial health, but it is also important to consider the broader financial context. For example, continual surplus without investment might indicate underutilization of resources.
- Earned Surplus: Part of the surplus arising from the retained earnings of a company after dividend distributions.
- Unappropriated Surplus: Surplus or retained earnings not yet allocated for specific purposes.
- Deficit: The opposite of surplus, indicating that liabilities exceed assets.
Online References
Suggested Books for Further Studies
- Financial Accounting by Robert Libby, Patricia A. Libby, and Frank Hodge
- Accounting Principles by Jerry J. Weygandt, Paul D. Kimmel, and Donald E. Kieso
- Essentials of Corporate Finance by Stephen A. Ross
Fundamentals of Surplus: Finance Basics Quiz
### What does surplus represent in financial accounting?
- [ ] Only the total amount of sales made within a period.
- [ ] The total amount of liabilities.
- [x] The excess of total assets over total liabilities after deducting capital stock.
- [ ] The profit earned by a company.
> **Explanation:** Surplus in financial accounting represents the excess of total assets over total liabilities after deducting capital stock.
### Which of the following is likely to indicate a company's good financial health?
- [x] A significant surplus
- [ ] A high amount of liabilities
- [ ] High operational losses
- [ ] Low capital stock
> **Explanation:** A significant surplus typically indicates good financial health, signifying that the company's assets exceed its liabilities.
### How is surplus different from profit?
- [ ] Surplus includes taxes paid, while profit does not.
- [ ] Surplus is calculated before taxes, while profit is calculated after taxes.
- [x] Surplus is the excess of assets over liabilities, while profit is earnings after all expenses.
- [ ] Surplus is the total revenue, while profit is the total sales.
> **Explanation:** Surplus is the excess of assets over liabilities, while profit refers to earnings after all expenses have been deducted from revenues.
### Can a company have both a surplus and a deficit?
- [x] Yes, a company can have a financial surplus but an operational deficit.
- [ ] No, it is impossible for both to occur simultaneously.
- [ ] Only non-profit organizations can experience this.
- [ ] This only happens in government budgets.
> **Explanation:** A company can have a financial surplus (excess assets over liabilities) while also experiencing an operational deficit (spending more than it earns from operations).
### What term is used for surplus arising from retained earnings after dividend distributions?
- [ ] Deficit
- [x] Earned Surplus
- [ ] Fiscal Surplus
- [ ] Capital Surplus
> **Explanation:** Earned surplus refers to the surplus arising from retained earnings after dividend distributions.
### Which surplus is not yet allocated for specific purposes?
- [ ] Earned Surplus
- [ ] Used Surplus
- [ ] Allocated Surplus
- [x] Unappropriated Surplus
> **Explanation:** Unappropriated surplus refers to surplus that is not yet allocated for any specific purposes.
### What does a frequent high surplus without investment indicate?
- [x] Underutilization of resources
- [ ] High productivity
- [ ] Company profitability
- [ ] Increase in liabilities
> **Explanation:** A frequent high surplus without investment can indicate underutilization of resources, suggesting that the company is not reinvesting sufficiently.
### What is a common source of earned surplus?
- [ ] Issuance of new capital stock
- [ ] Increase in liabilities
- [x] Retained earnings
- [ ] Short-term loans
> **Explanation:** A common source of earned surplus is retained earnings, representing profits not distributed as dividends.
### If total assets are $600,000, total liabilities are $400,000, and capital stock is $100,000, what is the surplus?
- [ ] $200,000
- [ ] $100,000
- [x] $100,000
- [ ] $300,000
> **Explanation:** Using the formula, Surplus = Total Assets - Total Liabilities - Capital Stock, the surplus equals $100,000.
### When would a budgetary surplus usually arise?
- [ ] When expenses exceed income.
- [ ] When both income and expenses are equal.
- [x] When income exceeds expenses.
- [ ] When liabilities are more than assets.
> **Explanation:** A budgetary surplus arises when income exceeds expenses, indicating a positive financial position.
Thank you for exploring the concept of surplus in finance with us and challenging yourself with these quiz questions. Keep deepening your understanding of financial principles for continued success!
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