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:
- From stock issued at a premium to par or stated value (most common)
- From the proceeds of stock bought back and then resold again
- From a reduction of par or stated value or reclassification of capital stock
- From donated stock
- 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).