What is surplus;

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VOL. XII NEW YORK, NOVEMBER, 1929 No. 8
THE capital of a corporation is divided
into two parts: that which revolves
and that which is fixed. The revolving or
working part is supposed to increase as it
works. The fixed part has a habit of de­creasing,
and the decrease has to be ab­sorbed
by the increase of the part that
works.
Capital is an abstract term. It denotes
a certain number of dollars invested in an
enterprise. The concrete evidence of capi­tal
is found in the form of goods, or prop­erty,
or representations of money, to which
dollar values have been assigned.
If the things which represent working
capital increase in amount, through use,
their counterpart of necessity must in­crease.
If capital is a standard by which
financial condition is to be judged, then
any increase in values in excess of the
amount contributed as that standard, may
be regarded as surplus.
The surplus account was intended origi­nally,
no doubt, to show the increase,
through use, in the amount of working
assets. It was designed to show how much
could be extracted from those assets with­out
diminishing the amount originally in­vested
in them.
But necessity, expediency, and the march
of progress have made of the account, as
originally conceived, a heterogeneous af­fair,
difficult to describe, and meaningless
except when subjected to the merciless
test of strict analysis. Into it, of late
years, have gone amounts representing
estimated increases in the value of physical
property, market appreciation of highly
speculative common stocks held as invest­ments,
arbitrary apportionments of con­tributed
capital, adjustments resulting
from conversions of capital liabilities,
etc., etc.
The prime purpose of a surplus account
was to show the amount available for dis­tribution
as cash dividends. It has be­come
an account, in many instances, which
shows anything but that. The abuse of
the surplus account has resulted in a re­action
which bids fair to restore the
account to its proper meaning and use.
The efforts of the American Institute of
Accountants to bring about the practice of
designating such surplus as "earned sur­plus"
and to differentiate it from all other
forms of so-called surplus, are worthy of
prolonged applause.
Surplus, without doubt, is the excess of
assets over liabilities and capital. But,
more and more, fortunately, modern prac­tice
is coming to the point of relating the
surplus to the assets in which it rests; in
differentiating that part which is repre­sented
by accretions to current assets, and
What Is Surplus?