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. For example, a company’s balance sheet contains $500,000 of total assets and $300,000 of total liabilities. Its surplus is the difference between these two figures, or $200,000.

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.

Surplus FAQs

How is a surplus different from retained earnings?

A surplus represents the excess of resources or revenues over expenses for a single period. Retained earnings, by contrast, reflect the cumulative total of all past profits and losses that have been reinvested in the business. While a surplus is period-specific, retained earnings show the long-term accumulation of equity.

Can an entity report a surplus while experiencing negative operating cash flow?

Yes. An entity can report a surplus while experiencing negative operating cash flow because surplus is based on accrual accounting, not cash movement. Revenue may be recognized before collection, while expenses may include noncash charges. Consequently, reported earnings can remain positive even when operating activities consume cash during the period.