What is Stock Surplus in Finance?
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With respect to share capital, it is the amount of money that a company receives for its issued shares over and above the shares’ nominal value. In other words, it represents the difference between the nominal value and the market value of the shares. Stock surplus (also, share premium) arises when a company issues and sells shares for more than the nominal value. In which case, the shares are said to be have been issued at a premium– i.e., more than market value.
On the issuer’s balance sheet, the premium account appears as a share premium reserve account, recording the difference between the nominal value of the shares issued and the fair value of the consideration received. Stock surplus (or capital surplus, additional paid-in capital or share premium) is an account in a entity’s shareholders’ equity section on the balance sheet. It represents the money raised by issuing shares at a price exceeding par value or face value, which is a nominal value assigned to the shares at incorporation stage. In other words, it represents the excess amount that investors (shareholders) have paid for the shares above the stated par value.
For example, if a company issues one million shares (with a par of USD 1 per share) at USD 2 per share, then in its accounting books, it will record an increase in the issued shares of USD 1 million and an increase in the share premium reserve of USD 1 million (i.e. the USD 2 million received less the par value of the shares issued, USD 1 million).
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