fbpx

What is Surplus?

Surplus

Share This...

Surplus

“Surplus” is a term that has various meanings depending on the context in which it’s used. In general, it refers to an excess amount or a situation where income exceeds expenditure. Here are some common contexts and their specific definitions:

  • Economics: A surplus often refers to a situation where the supply of a product exceeds the demand for that product. This is the opposite of a shortage.
  • Government Budgets: A budget surplus occurs when a government’s tax revenues exceed its expenditures during a specific period. Conversely, a budget deficit arises when expenses surpass revenues.
  • Finance and Accounting:
    • Retained Earnings: In corporate finance, surplus can refer to retained earnings, which are earnings that are not distributed as dividends but are kept by the company to reinvest in its core business or to pay off debt.
    • Share Premium: It can also refer to the amount by which a company’s share price in a new share issuance exceeds its par (or nominal) value, also known as a share premium.
  • Insurance: In the insurance industry, surplus refers to the difference between an insurance company’s assets and its liabilities. This serves as a financial cushion above the required reserves, helping to ensure claims can be met even in adverse conditions.
  • Trade: A trade surplus occurs when the value of a country’s exports exceeds the value of its imports. Conversely, a trade deficit arises when the value of imports surpasses that of exports.

In general, the term “surplus” signifies an excess or abundance of something relative to what is needed or utilized.

Example of Surplus

An example for each context mentioned:

  • Economics:
    • Scenario: There’s a sudden fashion trend around glow-in-the-dark shoes. A company mass-produces these shoes expecting them to sell like hotcakes. However, the trend fades quickly. As a result, there’s a large number of these shoes left unsold in warehouses, leading to a surplus of glow-in-the-dark shoes.
  • Government Budgets:
    • Scenario: The government of “Techland” experiences a surge in tax revenue due to the booming tech industry in the country. In a particular fiscal year, they collect $500 billion in taxes but only spend $450 billion on public services and projects. This results in a budget surplus of $50 billion.
  • Finance and Accounting:
    • Retained Earnings Scenario: “GadgetCo,” a tech company, earns a profit of $10 million in a year. They decide to distribute $4 million as dividends to shareholders and keep the remaining $6 million for future investments. This $6 million is referred to as a surplus or retained earnings.
    • Share Premium Scenario: “NovelTech Inc.” issues shares with a par value of $10 each. However, due to high demand and confidence in the company, investors are willing to pay $15 per share. The $5 excess over the par value is recorded as a share premium or surplus.
  • Insurance:
    • Scenario: “SafeGuard Insurance” has total assets worth $100 million, including investments, cash, and properties. Their total liabilities, including potential claim payouts and other obligations, amount to $85 million. The difference, or $15 million, represents their surplus, indicating a cushion against unforeseen claims or downturns.
  • Trade:
    • Scenario: The fictional country “Exportia” specializes in producing electronics and sells products worth $200 billion to other countries in a year. In the same period, they import goods worth $150 billion. This results in a trade surplus of $50 billion.

Each of these examples demonstrates the concept of “surplus” in different contexts, emphasizing the overarching theme of excess or abundance relative to what’s utilized or needed.

Other Posts You'll Like...

Want to Pass as Fast as Possible?

(and avoid failing sections?)

Watch one of our free "Study Hacks" trainings for a free walkthrough of the SuperfastCPA study methods that have helped so many candidates pass their sections faster and avoid failing scores...