Various accounting authorities have recommended that the terms paid in surplus and earned surplus not be...

Various accounting authorities have recommended that the terms paid in surplus and earned surplus not be used in published financial statements. Explain briefly the reason for this suggestion and indicate acceptable substitutes for the terms.

Expert Solution

Answer)

Earned Surplus is the profits that the company retained after paying the dividend whereas surplus is like earned surplus a component of shareholders equity which organisation raises in excess of its share value at par.

The reason for not publishing such surplus in financial ststestate is because it is not the extra cash or cash left over but amount of profit that the company reinvested either for increasing the assets or for repayment of liabilities.

This earned Surplus have some impact on Dividend policy as the company must take the decision either to pay dividend or to invest.

We often observe comparing the earned surplus is compared to earned surplus with profit per share for the period and surplus with change in price of the shares.

With these surplus and retained earnings investors see it positively as with their initial investment they can get good returns in future as it an favourable indication on financial position of the company.

ekkarill92 answered 1 year ago

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