What is Capital Surplus?
Capital surplus is the additional paid-in excess of par value that investors pay when they are buying shares from the issuing entity. The term is not commonly used because people use additional paid-in capital in the accounting literature.
Explanation of Capital Surplus.
A par value was originally the price at which a company’s shares were offered for sale, so that investors would know that the company will not sell their shares for under the par value. In some stated in the US, it is no longer required and companies can set their par value at a minimal amount. The result is that nearly the entire price paid for a share is recorded as additional paid-in capital. If a company issues shares that have no stated par value, there will be no capital surplus and so the funds are recorded in the common stock account.
Example of how capital surplus works.
Let’s say company A sells 100 of its shares at $1 par value common stock for $10 per share. It will record $100 of the $1000 in total proceeds in the Common Stock account and $900 in the Additional Paid-In Capital account. If the term was still in use, the $900 would be entered in the Capital Surplus Account.
If Capital Surplus was still in use, a company would acquire a capital surplus by selling its stock to investors at a price above the par value of the stock. The incremental amount above the par value will be identified as capital surplus.