Define Acquired Surplus:

"Acquired Surplus, also known as Paid-in Capital or Contributed Surplus, is an important accounting concept that reflects the excess of the total amount of money received from shareholders over the nominal or par value of the company's shares"

Explain Acquired Surplus:

Introduction:

Acquired Surplus, also known as Paid-in Capital or Contributed Surplus, is an important accounting concept that reflects the excess of the total amount of money received from shareholders over the nominal or par value of the company's shares. It represents the equity contributed by shareholders to the company, which is not classified as retained earnings.

In this article, we explore the concept of Acquired Surplus, its types, and provide examples to illustrate its significance in financial accounting.

1. Understanding Acquired Surplus:

   Acquired Surplus is a component of shareholders' equity on a company's balance sheet. It comprises the excess funds received from shareholders when they purchase the company's shares at a price higher than the par value of the shares. Par value is the nominal value assigned to each share when the company is incorporated. The difference between the issue price and the par value represents the Acquired Surplus.

2. Types of Acquired Surplus:

   There are two main types of Acquired Surplus:

   a. Common Stock Surplus: Common Stock Surplus, also known as Additional Paid-in Capital, arises when a company issues common shares at a price higher than their par value. The additional amount paid by shareholders over the par value is recorded as Common Stock Surplus. This type of Acquired Surplus is common in publicly traded companies and is considered a permanent source of equity.

   Example: ABC Corporation issues 10,000 common shares at $20 per share, and the par value of each share is $5. The Common Stock Surplus would be calculated as follows: Common Stock Surplus = (Issue Price - Par Value) x Number of Shares Issued Common Stock Surplus = ($20 - $5) x 10,000 = $150,000

   b. Preferred Stock Surplus: Preferred Stock Surplus, also known as Additional Paid-in Capital for Preferred Stock, is similar to Common Stock Surplus but applies to the issuance of preferred shares. Preferred shares have a fixed dividend rate and priority over common shares in the distribution of dividends and liquidation proceeds. The additional amount received over the par value of preferred shares is recorded as Preferred Stock Surplus.

   Example: XYZ Corporation issues 5,000 preferred shares at $50 per share, and the par value of each share is $25. The Preferred Stock Surplus would be calculated as follows: Preferred Stock Surplus = (Issue Price - Par Value) x Number of Shares Issued Preferred Stock Surplus = ($50 - $25) x 5,000 = $125,000

3. Significance of Acquired Surplus:

   Acquired Surplus is an essential component of shareholders' equity as it represents the capital contributed by shareholders to the company. It reflects the company's ability to raise funds from investors, which is crucial for financing its operations and growth.

   The presence of Acquired Surplus on the balance sheet indicates that the company has a strong financial position and that investors have confidence in its future prospects.

4. Accounting Treatment:

   Acquired Surplus is recorded in the shareholders' equity section of the balance sheet. It is separate from retained earnings, which represents the accumulated profits of the company. Acquired Surplus is considered a part of the total equity of the company and provides a clear picture of the sources of shareholders' funds.

Conclusion:

Acquired Surplus is a significant concept in financial accounting, reflecting the excess funds received from shareholders over the par value of shares. It consists of both Common Stock Surplus and Preferred Stock Surplus, representing the additional paid-in capital for common and preferred shares, respectively. Acquired Surplus contributes to the company's equity and financial stability, providing insight into the shareholders' confidence and support for the company's growth and operations. Understanding Acquired Surplus is crucial for financial analysts, investors, and stakeholders as it helps in assessing the financial health and capital structure of a company.