Capital surplus
Encyclopedia
Capital surplus term that frequently appears as a balance sheet
item as a component of shareholders' equity. Capital surplus is used to account for that a firm raises in excess of the par value
(nominal value) of the shares (common stock
).
Taken together, common stock (and sometimes preferred stock) issued and paid plus capital surplus represent the total amount actually paid by investors for shares when issued (assuming no subsequent adjustments or changes).
Shares for which there is no par value
will generally not have any form of capital surplus on the balance sheet; all funds from issuing shares will be credited to common stock issued.
Some other scenarios of causing Capital Surplus include Government donate a piece of land to the company.
The Capital surplus/Share premium account (SPA) is not distributable, however, in restricted circumstances it can be reduced:
It may also be used to account for any gains the firm may derive from selling treasury stock
, although this is less commonly seen.
Capital Surplus is also a term used by economists to denote capital inflows in excess of capital outflows on a country's balance of payments
.
Any premium received over the par value is credited to capital surplus.
(1) If a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount or value of the premiums on those shares shall be transferred to an account called "the share premium account".
(2) The share premium account may be applied by the company in paying up unissued shares to be allotted to members as fully paid bonus shares, or in writing off-
(a) the company's preliminary expenses; or
(b) the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company,
or
(c) in providing for the premium payable on redemption of debentures of the company.
(3) Subject to this, the provisions of this Act relating to the reduction of a company's share capital apply as if the share premium account were part of its paid up share capital.
A company's SPA is a part of creditors' buffer.
At the same time, the company issues 50 preference shares with a par value of $0.5. These shares are bought by investors for $1 each.
The firm's balance sheet at this point consists of only four items:
Assets:
Liabilities:
Shareholders' equity:
SPA = Number of new shares issued x (issue price - par value)
Balance sheet
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...
item as a component of shareholders' equity. Capital surplus is used to account for that a firm raises in excess of the par value
Par value
Par value, in finance and accounting, means stated value or face value. From this comes the expressions at par , over par and under par ....
(nominal value) of the shares (common stock
Common stock
Common stock is a form of corporate equity ownership, a type of security. It is called "common" to distinguish it from preferred stock. In the event of bankruptcy, common stock investors receive their funds after preferred stock holders, bondholders, creditors, etc...
).
Taken together, common stock (and sometimes preferred stock) issued and paid plus capital surplus represent the total amount actually paid by investors for shares when issued (assuming no subsequent adjustments or changes).
Shares for which there is no par value
Par value
Par value, in finance and accounting, means stated value or face value. From this comes the expressions at par , over par and under par ....
will generally not have any form of capital surplus on the balance sheet; all funds from issuing shares will be credited to common stock issued.
Some other scenarios of causing Capital Surplus include Government donate a piece of land to the company.
The Capital surplus/Share premium account (SPA) is not distributable, however, in restricted circumstances it can be reduced:
- to write off the expenses/commission relating to the issue of those shares;
- to make a bonus issue of fully paid-up shares.
It may also be used to account for any gains the firm may derive from selling treasury stock
Treasury stock
A treasury stock or reacquired stock is stock which is bought back by the issuing company, reducing the amount of outstanding stock on the open market ....
, although this is less commonly seen.
Capital Surplus is also a term used by economists to denote capital inflows in excess of capital outflows on a country's balance of payments
Balance of payments
Balance of payments accounts are an accounting record of all monetary transactions between a country and the rest of the world.These transactions include payments for the country's exports and imports of goods, services, financial capital, and financial transfers...
.
Background
Many firms authorize shares with some nominal par value, often the smallest unit of currency commonly in use (such as one penny or $0.01), in many jurisdictions due to legal requirements. The firm may then sell these shares for a much higher price (as the par value is a largely archaic and fictional concept).Any premium received over the par value is credited to capital surplus.
Share premium account
According to Companies Act 1985 s.130 and companies ordinance 1984 (Nepal) s.84 :(1) If a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount or value of the premiums on those shares shall be transferred to an account called "the share premium account".
(2) The share premium account may be applied by the company in paying up unissued shares to be allotted to members as fully paid bonus shares, or in writing off-
(a) the company's preliminary expenses; or
(b) the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company,
or
(c) in providing for the premium payable on redemption of debentures of the company.
(3) Subject to this, the provisions of this Act relating to the reduction of a company's share capital apply as if the share premium account were part of its paid up share capital.
A company's SPA is a part of creditors' buffer.
Examples
For example, a company issues 100 ordinary shares of a nominal value of $1 each at a subscription price of $4 per share. The $300 difference will go to the share premium account.At the same time, the company issues 50 preference shares with a par value of $0.5. These shares are bought by investors for $1 each.
The firm's balance sheet at this point consists of only four items:
Assets:
- Cash: $450
Liabilities:
Shareholders' equity:
- Common stock: $100
- Preference stock: $25
- Share premium: $325
SPA = Number of new shares issued x (issue price - par value)
See also
- Share premium
- Common stockCommon stockCommon stock is a form of corporate equity ownership, a type of security. It is called "common" to distinguish it from preferred stock. In the event of bankruptcy, common stock investors receive their funds after preferred stock holders, bondholders, creditors, etc...
- Preferred stockPreferred stockPreferred stock, also called preferred shares, preference shares, or simply preferreds, is a special equity security that has properties of both an equity and a debt instrument and is generally considered a hybrid instrument...
- Treasury stockTreasury stockA treasury stock or reacquired stock is stock which is bought back by the issuing company, reducing the amount of outstanding stock on the open market ....
- Paid in capitalPaid in capitalPaid in capital refers to capital contributed to a corporation by investors through purchase of stock from the corporation . It includes share capital Paid in capital (Paid-in capital or Contributed capital) refers to capital contributed to a corporation by investors through purchase of stock...
- Reserve (accounting)Reserve (Accounting)In financial accounting, the term reserve is most commonly used to describe any part of shareholders' equity, except for basic share capital. Sometimes, the term is used instead of the term provision; such a use, however, is inconsistent with the terminology suggested by International Accounting...
- Shareholders' equity
- Balance sheetBalance sheetIn financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...