surplus

play
noun sur·plus \ˈsər-(ˌ)pləs\
Updated on: 26 Jul 2017

Definition of surplus

  1. 1a :  the amount that remains when use or need is satisfiedb :  an excess of receipts over disbursements

  2. 2 :  the excess of a corporation's net worth over the par or stated value of its stock

surplus

adjective

Examples of surplus in a Sentence

  1. If there is any surplus, it will be divided equally.

  2. There is a surplus of workers and not enough jobs.

Recent Examples of surplus from the Web

These example sentences are selected automatically from various online news sources to reflect current usage of the word 'surplus.' Views expressed in the examples do not represent the opinion of Merriam-Webster or its editors. Send us feedback.

Origin and Etymology of surplus

Middle English, from Anglo-French, from Medieval Latin superplus, from Latin super- + plus more — more at plus


Financial Definition of SURPLUS

surplus

What It Is

Earned surplus is the sum of a company's profits, after dividend payments, since the company's inception. It can also be called retained earnings, retained capital, or accumulated earnings.

How It Works

Let's look at an example to illustrate.

Assume Company XYZ has been in business for five years, and it has reported the following annual net income:

Year 1: $10,000

Year 2: $5,000

Year 3: -$5,000

Year 4: $1,000

Year 5: -$3,000

Assuming Company XYZ paid no dividends during this time, XYZ's earned surplus is the sum of its net profits since inception: $10,000 + $5,000 - $5,000 + $1,000 - $3,000 = $8,000.

In subsequent years, XYZ's earned surplus will change by the amount of each year's net income, less dividends.

The statement of earned surplus summarizes changes in earned surplus for a fiscal period, and total earned surplus appears in the shareholders' equity portion of the balance sheet. This means that every dollar of earned surplus is essentially another dollar of shareholders' equity.

A company's board of directors may "appropriate" some or all of the company's earned surplus when it wants to restrict dividend distributions to shareholders. Appropriations are usually done at the board's discretion, although bondholders may contractually require the board to do so. Appropriations appear as a special account in the earned surplus section. When an appropriation is no longer needed, it is transferred back to earned surplus. Because earned surplus is not cash, a company may fund appropriations by setting aside cash or marketable securities for the projects indicated in the appropriation.

Why It Matters

It is important to understand that earned surplus does not represent extra cash or cash left over after the payment of dividends. Rather, earned surplus demonstrates what a company did with its profits; they are the amount of profit the company has reinvested in the business since its inception. These reinvestments are either asset purchases or liability reductions.

Earned surplus somewhat reflects a company's dividend policy, because it reflects a company's decision to either reinvest profits or pay them out to shareholders. Ultimately, most analyses of earned surplus focuses on evaluating which action generated or would generate the highest return for the shareholders.

Most of these analyses involve comparing earned surplus per share to profit per share over a specific period, or they compare the amount of capital retained to the change in share price during that time. Both of these methods attempt to measure the return management generated on the profits it plowed back into the business. Look-through earnings, a method developed by Warren Buffett that accounts for taxes, is another method in this vein.

Capital-intensive industries and growing industries tend to retain more of their earnings than other industries because they require more asset investment just to operate. Also, because earned surplus represents the sum of profits less dividends since inception, older companies may report significantly higher earned surplus than identical younger ones.

This is why comparison of earned surplus is difficult but generally most meaningful among companies of the same age and within the same industry, and the definition of "high" or "low" earned surplus should be made within this context.



SURPLUS Defined for English Language Learners

surplus

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noun

Definition of surplus for English Language Learners

  • : an amount (such as an amount of money) that is more than the amount that is needed


SURPLUS Defined for Kids

1

surplus

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noun sur·plus \ˈsər-pləs\

Definition of surplus for Students

  1. :  an amount left over :  excess


2

surplus

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adjective sur·plus

Definition of surplus for Students

  1. :  left over :  extra surplus wheat


Law Dictionary

surplus

play
noun sur·plus \ˈsər-ˌpləs\

Legal Definition of surplus

  1. 1a :  an amount that remains when a use or need is satisfied b :  an excess of receipts over disbursements c :  the value of assets after subtracting liabilities

  2. 2 :  an excess of the net worth of a corporation over the par value of its capital stock — compare undivided profits capital surplus :  all surplus other than earned surplus earned surplus :  the surplus that remains after deducting losses, distributions to stockholders, and transfers to capital stock accounts paid–in surplus :  surplus resulting from the sale of stock at amounts above par



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