Legal Definitions - earned surplus

Earned surplus, also known as retained earnings, is the profit that a company keeps after paying out dividends to shareholders and setting aside money for future investments or debt repayment. It is the balance of net profits, income, and gains after deducting losses and distributions to stockholders and transfers to capital stock accounts. This surplus is not taxable as a dividend.

• A company earns a profit of $100,000 in a year. It pays out $20,000 in dividends to shareholders and sets aside $30,000 for future investments. The remaining $50,000 is the earned surplus that the company can use for other purposes.
• Another company earns a profit of $50,000 in a year. It does not pay out any dividends to shareholders and does not have any debt to repay. The entire $50,000 is retained as earned surplus.

These examples illustrate how earned surplus is the portion of a company's profit that is not distributed to shareholders or used for debt repayment. Instead, it is kept by the company for future investments or other purposes.