Earned surplus refers to a company’s earnings which are not distributed as dividends, but are instead allocated for reinvestment in the business. The money may be used for the purchase of equipment, better facilities, and other assets. It may also be set for the funding of research and development. In some cases, this amount may also be used for paying off the company’s debts. Earned surplus is recorded as part of owners’ equity.
Alternatively called retained earnings or accumulated earnings, earned surplus can aid in the growth of a business because it facilitates the acquisition more assets which may bring in even more income in the future. At the same time, it may serve as a buffer during uncertain times or when profits dip. Thus, investors may be assured that dividends can still be maintained by the company.
Investors receive part of the company’s earnings in the form of dividends, so withholding some of the company’s profit from shareholders may not appear to be advantageous to them, at least initially. However, it is also important to realize that the amount which is not being distributed is being reinvested with the purpose of growing the company further. Since ideally, the company stands to make more money in the future as a result of retaining some earnings, this can be viewed as a kind of investment for shareholders, as well. The situation is therefore advantageous for investors, as long as the use of earned surplus is for continuous company expansion and development. If, on the other hand, earned surplus is consistently used only for survival purposes, then investors should be more wary.