Contributed Surplus

An extended type of equity account

What is contributed surplus?

Contributed Surplus is an account under the equity portion of the balance sheet that holds any excess amounts made from the issuance of shares with a par value. This 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. A contributed surplus transaction will often specify where the surplus is coming from. Different company’s may set up a varying number of contributed surplus accounts, each with specific names to highlight where the amount has come from.

Contributed surplus account types

Regardless of account naming, there are three main types of contributed surplus accounts. Each type has different criteria for recognizing equity that falls under it.

Contributed Surplus – Type A: This type of contributed surplus account carries any excess on the issuance of shares with a par value. No amount is carried into contributed surplus if a share with zero par value is issued.

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) of this is allocated to the ‘common stock’ equity account, and the remaining $1,200,000 (50,000 shares * ($25-$1)) is allocated to ‘contributed surplus – issuance of common shares’. This account is a Contributed Surplus – Type A account.

Contributed Surplus – Type B: These accounts carry any gains made on repurchasing stock. If a loss is made, then the loss is taken out of this account, unless under special circumstances (link to article on preferential order of deduction in contributed surplus). When a stock is purchased, it is taken of the books at the value it was entered in, but is paid for at market value. When market value exceed book value,  there

Example: CFI Inc. decides 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 rose to $20. This means that company gets to keep $5 in value per share on 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.

Contributed Surplus – Type C: 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 some complex financial instruments. This type of contributed surplus account is a bit more complex in nature to understand. Please visit the article dedicated to Contributed Surplus – Type C if you would like to know more.

Common types of Type C accounts include:

  • Contributed Surplus – Warrants
  • Contributed Surplus – Expired warrants
  • Contributed Surplus – Stock Options
  • Contributed Surplus – Expired Stock Options
  • Contributed Surplus – Conversion rights (on convertible bonds)