Earned surplus, also commonly referred to as retained earnings, is the accumulated portion of net income that a corporation retains for reinvestment in the business, after distributing dividends to shareholders. In other words, it’s the net income a company has left over after paying dividends to its shareholders.
Earned surplus is a part of the company’s total equity or shareholders’ equity, which also includes paid-in capital (the money shareholders invested in the company). The amount of earned surplus can be a sign of a company’s profitability or lack thereof.
You can find the earned surplus in the equity section of the balance sheet. Over time, the earned surplus will change with the addition of yearly net income and subtraction of dividends paid to shareholders.
For example, if a company starts the year with an earned surplus of $100,000, makes a net income of $50,000 during the year, and pays out $10,000 in dividends, the earned surplus at the end of the year would be $140,000 ($100,000 + $50,000 – $10,000). This amount would be carried over to the next year, where it would be adjusted by the next year’s net income and dividends.
It’s important to note that a negative earned surplus (also called an accumulated deficit) could indicate that a company has been unprofitable and has more losses than profits over its lifetime, or it may indicate that the company has paid out more in dividends than it has made in net income.
Example of Earned Surplus
Let’s look at a hypothetical example using a company we’ll call XYZ Corp.
At the start of the fiscal year, XYZ Corp. has an earned surplus (retained earnings) of $500,000. Over the course of the year, the company has a good year and posts a net income of $200,000. This net income is added to the earned surplus, making it $700,000.
So, at the end of the year, XYZ Corp.’s earned surplus would be calculated as follows:
Starting earned surplus: $500,000
Plus net income: +$200,000
Minus dividends: -$100,000
Ending earned surplus: $600,000
So, XYZ Corp.’s earned surplus at the end of the year would be $600,000. This is the amount of net income that has been retained and can be used for reinvestments in the business, paying down debt, or saved for future use. The earned surplus is reported in the equity section of the company’s balance sheet.