Capital Surplus
Capital surplus, also known as “additional paid-in capital” or “share premium,” is an account in a company’s shareholders’ equity section on the balance sheet. It represents the amount of money raised by issuing shares above their par value or face value, which is a nominal value assigned to the shares during the company’s incorporation. In other words, capital surplus is the excess amount that investors have paid for the shares above the stated par value.
Capital surplus can arise in various situations, such as:
- Initial public offering (IPO): When a company goes public and issues shares for the first time, the difference between the offering price and the par value of the shares is recorded as capital surplus.
- Seasoned equity offering (SEO): When an existing public company issues new shares at a price higher than the par value, the excess amount is recorded as capital surplus.
- Stock options and grants: When employees exercise stock options or receive stock grants at a price lower than the current market price, the difference between the market price and the exercise price is recorded as capital surplus.
Capital surplus is an important component of shareholders’ equity, as it represents the additional funds that the company has raised from investors beyond the par value of the shares. These funds can be used for various purposes, such as financing growth, paying off debt, or investing in new projects. Capital surplus is a non-distributable reserve, meaning it cannot be directly paid out as dividends to shareholders. Instead, it must be retained within the company or used for other lawful purposes, such as share buybacks or capital investments.
Example of a Capital Surplus
Let’s consider a fictional example of a company called “GreenEnergy Corp.” to illustrate capital surplus.
GreenEnergy Corp. is a renewable energy company that decides to go public through an initial public offering (IPO). The company issues 1 million shares of common stock with a par value of $0.10 per share. During the IPO, the shares are offered to investors at a price of $20.00 per share, significantly higher than the par value.
Now, let’s calculate the capital surplus for GreenEnergy Corp.
- Par value of shares: The total par value of the shares issued is 1 million shares * $0.10 per share = $100,000.
- Total proceeds from the IPO: GreenEnergy Corp. raises 1 million shares * $20.00 per share = $20,000,000 from the IPO.
- Capital surplus: The capital surplus is calculated as the total proceeds from the IPO minus the par value of the shares issued. In this case, the capital surplus is $20,000,000 – $100,000 = $19,900,000.
In this example, GreenEnergy Corp. records a capital surplus of $19,900,000 on its balance sheet under the shareholders’ equity section. This amount represents the excess funds the company has raised from investors above the par value of its shares. These funds can be used to support the company’s growth, pay off debt, or invest in new projects, but they cannot be directly paid out as dividends to shareholders.
