Surplus definition

What is a Surplus in Business?

A surplus is the residual amount of resources remaining after a period of usage. In the manufacturing area, a surplus refers to the excess amount of goods that were produced but could not be sold; in this case, a surplus may be bad, since the extra goods tie up working capital and may need to be written off if they become obsolete or spoil. However, a business with seasonal sales will likely need to build up a surplus of goods in order to meet demand during the peak selling season; in this case, having a surplus is an essential requirement for maximizing sales.

What is a Surplus in Accounting?

In the accounting area, a surplus refers to the amount of retained earnings recorded on an entity's balance sheet; a surplus is considered to be good, since it implies that there are excess resources available that can be used in the future.

Reasons for a Surplus

In terms of supply and demand, a surplus occurs when a supplier perceives that there is more customer demand than is really the case. This may be caused by a price increase that turns away customers, or a sales projection that turns out to be excessively optimistic. It is also possible that customer demand has unexpectedly declined, perhaps due to a shift in fashions or a macroeconomic event, such as a downturn in the economy.