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Contributed surplus is an account in the shareholders’ equity section of the balance sheet that reflects excess amounts collected from the issuance of shares above their par value. The account also holds gains and losses from the issuance, repurchase, and cancellation of shares, as well as gains and losses from the sale of complex financial instruments. It is also commonly referred to as Additional Paid-In Capital.
A contributed surplus transaction will typically specify where the surplus is coming from. Different companies may set up a varying number of related accounts, each with specific names highlighting where the amount has come from.
Contributed Surplus Account Types
Regardless of what the account is named, there are three main types of contributed surplus accounts. Each type has different criteria for recognizing equity that falls under it.
This type of contributed surplus account carries any excess on the issuance of shares with a par value. If shares are issued at par value, then no amount is recorded in this account.
Example: CFI Inc. issues 50,000 $1 par value common shares at $25 each, and so receives $1,250,000 in cash for the transaction. $50,000 (50,000 shares * $1/share) is allocated to the common stock equity account, and $1,200,000 (50,000 shares * ($25-$1)) is allocated to a Contributed Surplus account – Issuance of Common Shares.
These accounts carry any gains or losses made on repurchasing its own stock. When a stock is purchased, it is removed from the books at the value it was issued at, and any difference between book value and what the company paid (market value) is recorded in this account.
Example: CFI Inc. decides to repurchase all 50,000 shares it originally issued in the previous example. In the time that has passed since then, the market value of the shares declined to $20. This means that the company records $5 in value per share on the repurchase for a total of $250,000 (50,000 shares x $5 / share). This extra $250,000 is credited into Contributed Surplus – Repurchase and Cancellation of Common Shares, which is a Type B account.
These accounts carry any other equity value on share transactions that don’t fall under type A or B. These accounts also carry any values that result from the sale of complex financial instruments.
Common Type C accounts include:
Expired Stock Options
Conversion rights (on convertible bonds)
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