What is Capital Surplus?

Legal Definition
Capital surplus, also called share premium, is an account which may appear on a corporation's balance sheet, as a component of shareholders' equity, which represents the amount the corporation raises on the issue of shares in excess of their par value (nominal value) of the shares (common stock).

This is called Additional paid in capital in US GAAP terminology but, additional paid in capital is not limited to share premium. It is a very broad concept and includes tax related and conversion related adjustments.

Taken together, common stock (and sometimes preferred stock) issued and paid plus capital surplus represent the total amount actually paid by investors for shares when issued (assuming no subsequent adjustments or changes).

Shares for which there is no par value will generally not have any form of capital surplus on the balance sheet; all funds from issuing shares will be credited to common stock issued.

Some other scenarios for triggering a capital surplus include when the Government donates a piece of land to the company.

The capital surplus/share premium account (SPA) is generally not distributable, but may be used to:

  • write off the expenses/commission relating to the issue of those shares, or
  • make a bonus share issue of fully paid-up shares.

It may also be used to account for any gains the firm may derive from selling treasury stock, although this is less commonly seen.

Capital surplus is also a term used by economists to denote capital inflows in excess of capital outflows on a country's balance of payments.
-- Wikipedia
Legal Definition
Capital surplus (also referred to as additional paid in capital, paid in capital in excess of par or share premium, is an accounting term which frequently appears as a balance sheet item as a component of shareholders' equity.