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Making Profits and Business Surplus

The aim of business is to make profits, and in the ordinary course of making and selling goods or services, profits should accumulate. If for the present we restrict our attention to the corporation, we may inquire if there are any ways in which a surplus may be built up other than through current operations.

A surplus may also be created through the reappraisal of some of the company's fixed assets or through a sale of them at more than the value at which they have been carried on the books. A surplus may be created through the donation of an asset or of stock, as when a promoter buys all the stock of a company, pays for it with a mine or a patent and then donates a part of the stock in order that it may be sold as treasury stock below par.

So, too, a surplus may be created by the sale of stock or bonds above par, as in the case of the sale of bank stocks. Still another method is to convert unnecessary reserves, such as reserves for depreciation which prove too large, by transferring them to the surplus account. Moreover, a consolidation may start off with a surplus inherited from the constituents of the consolidation.

The fundamental idea of a surplus is an excess of value beyond what was originally contributed by the proprietors. In a corporation, then, surplus is most easily conceived of as the difference between the assets on the one hand and the true liabilities plus the reserves plus the outstanding capital stock on the other hand.

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Source: www.isnare.com