Capital surplus is a form of equity in a company that comes from sources other than retained earnings and capital stock. It is recorded on balance sheets under a separate entry so that the company, shareholders, and other interested parties can see how much of the company's equity is held in the form of capital surplus. Several other terms are used to refer to this accounting concept, including acquired surplus, paid-in surplus, share premium, donated surplus, and additional paid-in capital.
The most common way that a company acquires a capital surplus is by selling stock on the primary market above par value. When companies sell their stock on the primary market in an initial public offering, the proceeds of the sale go directly to the company, in contrast with sales on the secondary market where people sell shares to each other. The par value is an arbitrary value determined for the stock at the time of the offering.
When stocks are sold at par value, they are recorded on the balance sheet as capital stock. Shareholders who have purchased stock have equity in the company and the value of that equity is reflected in this accounting entry. If a company sells a stock above par value, the excess sale proceeds are recorded as capital surplus while the rest of the sale is recorded as capital stock. Not all stocks have a set par value.
There are other ways for a company to end up with capital surplus. Acquiring a company with a capital surplus is one method. Buying stock back and reselling it is another way, as is receiving donated stock. Significant events in a company's fiscal year tend to be announced at press releases and in company publications for the benefit of members of the public and the outcomes of these events can be seen recorded on the balance sheet.
Keeping track of shareholder's equity and other important financial information is required by law in many regions of the world. Companies must follow standardized accounting procedures to record accounting entries and they must make certain information available to the public if they are publicly traded. Government regulators also have the ability to inspect and review finances to confirm that a company is operating within the law, that its public filings are accurate, and that there are no glaring problems with the company's finances or the way it maintains its records.