Capital Surplus
1. Overview
Capital Surplus (or Share Premium) refers to the equity derived from capital transactions rather than from the company's retained earnings generated through operations. It represents the surplus resulting from transactions with shareholders, such as issuing stock, capital reduction, or selling treasury stock. It is a key component of shareholders' equity on the balance sheet.
2. Components
Under standard accounting practices, Capital Surplus typically includes the following:
2.1. Additional Paid-in Capital (APIC)
The premium paid by investors above the par value of shares upon issuance.
2.2. Gain on Capital Reduction
The surplus generated when the amount of capital reduction exceeds the amount refunded to shareholders during a capital decrease.
2.3. Gain on Disposal of Treasury Stock
The profit realized when a company sells its treasury stock for more than its acquisition cost.
3. vs. Retained Earnings
| Criteria | Capital Surplus | Retained Earnings |
|---|---|---|
| Source | Capital Transactions (with Shareholders) | Profit/Loss Transactions (Operations) |
| Nature | Contribution or Adjustment of Capital | Accumulation of Net Income |
| Dividends | Generally Restricted | Available (Primary Source) |
4. Legal Usage
In many jurisdictions, Capital Surplus cannot be distributed as cash dividends arbitrarily. It is restricted to specific uses:
- Deficit Compensation: Used to offset accumulated deficits (negative retained earnings) to improve the balance sheet.
- Capitalization: Used as a source for Bonus Issues (issuing new shares to existing shareholders for free) by transferring the surplus to the capital stock account.