The balance sheet of a business is the examination of a particular moment in the financial status of the business (as opposed to documents like the income statement, which examine an entire period instead). The balance sheet shows the company all the assets that it has, its total worth, as well as all the liabilities, short and long term, that the business must manage. Contributed surplus is a common item on the asset side of the balance sheet that helps differentiate different types of income.
A contributed surplus is a type of income that a business brings in, so it counts as cash, a common asset on the balance sheet. However, a contributed surplus does not come directly from profits. This means it does not show up in the same category as traditional types of income. Instead, it has a separate column that shows it has a different source.
There is no specific source that contributed surplus funds must come from, but usually it is derived from one or two basic financial actions. The most common source is a sale of company stock. When a company sells stock it usually sells it at initial par value. However, if a company waits until the price has risen or manages to sell shares for higher than the initial par value, the value above and beyond the par will be counted as a contributed surplus. It has no direct tie to profit but still increases business worth.
Purpose of Separation
The contributed surplus is a separate balance sheet item because the business needs to clearly separate its operational income from other types of income that it produces. Investors are interested primarily in the operating income that a business produces, since this is a useful way to judge how efficient a company is, how well it is managing its sales revenue and how solvent the organization is. Contributed surplus would artificially inflate these important income analyses if it was bundled with other, more practical types of income.
Share capital is another important item on the balance sheet that is closely connected with contributed surplus. The share capital numbers show the amount that shares earned the business in capital when they were first issued. This number is static, changing only when a business issues new stock. When a business sells above par, the value is split. The par value goes into share capital, while only the value earned above par goes into contributed surplus.