What is 'Capital Surplus'

Capital surplus includes equity or net worth otherwise not classifiable as capital stock or retained earnings. Most commonly, it arises when a corporation issues common stock and sells it for more than the par value of the stock, which is also called a premium.

In the past, the account Paid-in Capital in Excess of Par - Common Stock and the account Premium on Common Stock were referred to as capital surplus. Most balance sheets today call capital surplus paid-in surplus or paid-in capital [in excess of par].

BREAKING DOWN 'Capital Surplus'

Five ways capital surplus can be created include:

  1. From stock issued at a premium to par or stated value (most common)
  2. From the proceeds of stock bought back and then resold again
  3. From a reduction of par or stated value or reclassification of capital stock
  4. From donated stock
  5. From the acquisition of companies that have capital surpluses

Although item 1 is the most common method, items 2 and 5 should not be overlooked.

During the last decade, public companies have repurchased significant amounts of their common stock through share repurchase programs. In the future, to raise capital, these businesses could reissue treasury stock.

An uptick in M&A could also see more companies adjusting their balance sheets to account for capital surplus related accounting issues.

Capital stock can serve as an umbrella term for more specific classifications such as acquired surplus, additional paid-in-capital, donated surplus or reevaluation surplus (which could pop up during appraisals).

RELATED TERMS
  1. Surplus

    Surplus is the amount of an asset or resource that exceeds the ...
  2. Budget Surplus

    A budget surplus is a situation in which income exceeds expenditures. ...
  3. Adjusted Surplus

    The surplus (assets minus liabilities) of an insurance company ...
  4. Current Account Surplus

    A current account surplus is a positive current account balance, ...
  5. Surplus Spending Unit

    A surplus spending unit is an economic unit with income that ...
  6. Premium to Surplus Ratio

    Premium to surplus ratio is net premiums written divided by policyholders’ ...
Related Articles
  1. Investing

    Understanding Consumer Surplus

    Consumer surplus is an economic measure of consumer satisfaction, which is calculated by analyzing the difference between what consumers are willing to pay for a good or service, relative to ...
  2. Insights

    Germany, Not China, Is the U.S.'s Big Trade Threat

    While Trump is focused on China and Mexico, Germany is likely a bigger threat to American exporters.
  3. Managing Wealth

    3 Reasons To Buy Government Surplus for Your Small Business

    Learn why it's wise to access government surplus auctions to buy furnishings, equipment and other items to start a new business or expand an existing business.
  4. Investing

    What is a Share Premium Account?

    The share premium account is an equity account found on a company’s balance sheet.
  5. Investing

    Amazon Stock: Capital Structure Analysis (AMZN)

    Analyze Amazon's capital structure to determine what roles equity and debt play in financing operations. How has Amazon's financial leverage changed over time?
  6. Managing Wealth

    Issued share capital versus subscribed share capital

    Subscribed share capital is very different from issued share capital, which is the actual issued stock.
  7. Investing

    Understanding Capital And Financial Accounts In The Balance Of Payments

    The current, capital and financial accounts compose a nation's balance of payments, indicating the state of its economy and economic outlook.
  8. Investing

    UPS Stock: Capital Structure Analysis

    Analyze UPS' capital structure to determine the relative importance of debt and equity financing. Identify the factors influencing financial leverage trends.
  9. Investing

    Balance Sheet: Analyzing Owners' Equity

    Analyzing owners’ equity is an important analytics tool, but it should be done in the context of other tools such as analyzing the assets and liabilities on the balance sheet.
  10. Investing

    The History Of The T-Bill Auction

    Learn how the U.S. found the perfect solution to its debt problems and ended up creating one of the largest markets in the world.
RELATED FAQS
  1. What business risks ultimately caused Enron's collapse?

    Find out how a share premium account is taxed according to U.S. GAAP, which often refers to this account as additional paid-in ... Read Answer >>
  2. Why can additional paid in capital never have a negative balance?

    Find out why the additional paid-in capital entry on a company's balance sheet can never be negative and how paid-in capital ... Read Answer >>
  3. Par Value Stock vs No Par Value Stock

    Understand the difference between par and no par value stock and how this differentiation affects corporate liabilities and ... Read Answer >>
  4. Par value vs market value

    Learn about the difference between the par value and market value of financial securities, including the role they play in ... Read Answer >>
  5. How does a nation's balance of payments affect its capital stock?

    Find out how changes in a country's balance of payments can reflect changes in the capital stock of that nation's businesses ... Read Answer >>
Hot Definitions
  1. Return On Equity - ROE

    The profitability returned in direct relation to shareholders' investments is called the return on equity.
  2. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  3. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  4. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  5. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  6. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
Trading Center