What is Contributed Surplus?
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In this article, we will break down the notion of Contributed Surplus so you know all there is to know about it!
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What Is Contributed Surplus
Contributed surplus (“surplus d’apport” in French or “additional paid-in capital”) is a term used to refer to the issuance of shares of stock above their par value.
In essence, “contributed surplus” is an account term business owners and entrepreneurs may hear when preparing their company’s financial statements (particularly the balance sheet).
A “par value” refers to the value associated with the shares.
For example, the shares of stock in Company ABC have a par value of $1.00 per share.
If the Company ABC issues shares above the par value of $1.00, then it must report a contributed surplus on its balance sheet.
Companies are required to separate income coming from their operations and income coming from other sources.
For example, an investor will be curious to know how a company generated income or positive cash flow, was it through profitable operations or through excessive issuance of equity securities?
A company’s balance sheet shows the company’s assets and liabilities it has acquired over time.
As such, the “contributed surplus account” is a line item on the balance sheet allowing the reader or investor to differentiate the source of a company’s income.
Contributed Surplus Definition
According to the BDC, contributed surplus is defined as follows:
Contributed surplus is the accounting term used whenever shares are sold at a price above their stated par value
The key elements of this definition are the following:
- It’s an account term
- Relates to the recording of the sale of shares
- When the shares are sold above the “par value”
Contributed Surplus On Balance Sheet
Let’s look at how the contributed surplus appears on a company’s balance sheet.
When shares are initially issued, the amount the company receives in compensation for the shares issued gets recorded in the “common stock” account and “contributed surplus” account.
These two accounts are components of the retained earnings appearing on the company’s balance sheet.
For this reason, we say that the contributed surplus is on the “balance sheet”.
For example, if a company’s common shares have a par value of $1 and they are sold for $15, the company will allocate $1 per share to the common stock account and $14 per share ($15 less $1) to the contributed surplus account.
On the balance sheet, the company will record the value received for the common stock at its par value along with a separate entry showing how much the company received above the par value ($14 in our example).
In addition to gains, the company will also record losses from the issuance of shares on its balance sheet.
Losses can occur when the company repurchases shares, cancels shares, or transfers shares in the context of a financial strategy or reorganization.
Contributed Surplus Accounting
When a company issues shares for financing purposes where the shares are sold above their par value, the company must report the sums received for the shares for its par value and contributed surplus.
Essentially, you’ll have two accounting entries:
- Par value entry
- Contributed surplus entry
The par value entry represents the amount the company received in money at the stock’s par value.
The contributed surplus entry represents the amount the company received above the par value.
Let’s see how that works.
If a company sells 100,000 common shares with a $10 par value sold for $100, then the company will make the following accounting entries:
- Common stock: $1,000,000 at par value of $10 per share (100,000 shares X $10 per share)
- Contributed surplus: $9,000,000 ($10,000,000 received less $1,000,000 par value)
When these two entries are recorded, the company will have a total shareholders’ equity of $10,000,000.
Contributed Surplus Account Types
To provide you further insights into the contributed surplus account, you should note that there are three main types of contributed surplus accounts:
- Type A
- Type B
- Type C
The Type A accounts are for shares issued for an amount over its par value.
The Type B accounts are for those transactions that carry gains or losses when stocks are repurchased.
The Type C accounts are for transactions relating to other types of securities having an equity value that do not fall under Type A or Type B such as the issuance of warrants, stock options, conversion rights on convertible bonds, etc.
“Contributed Surplus” Takeaways
So, what does “contributed surplus” mean?
Let’s look at a summary of our findings.
Contributed Surplus Meaning
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