Q32Q. - Intermediate Accounting (Kieso)

Question

What is the profession’s recommendation in regard to the use of the term “surplus”? Explain.

Step-by-Step Solution

Answer

Professionals recommend that business entities not use “surplus” in the balance sheet.

Definition of Retained Earnings

The net income of the business entity kept with a view of re-investment or distribution among the holders of equity securities is known as retained earnings. 

Use of Term Surplus

Professionals state that a business entity must no longer use the word surplus in their balance sheet to represent the stockholder’s equity. Apart from the accounting field, the meaning of the term surplus is different. Reporting terms such as capital surplus and paid-in-surplus will confuse non-accounting background individuals, leading to misrepresentation.