Occasionally, instead of the use of either Profit and Loss or Surplus for this purpose, an account is set up on the books called “Surplus Adjustments” through which these items are cleared into Surplus. The objection raised above to this use of Surplus applies with equal force to “Surplus Adjustment.”
Statement of Surplus
At the close of each period account must usually be taken of a group of items which cannot properly be treated as belonging to that period. Some of these may be items which were overlooked at the close of previous fiscal periods and cannot now be taken into the record for that period. Some things may wrongfully have been included in, or omitted from, the inventory; the inventory may have been under-or overvalued; errors may have been made in the separation of capital from revenue expenditures; wrong depreciation and bad debts estimates may have been made—these and similar items call for adjustment at the close of the current period. Where adjustments are few and simple, the statement of surplus on the balance sheet may be extended sufficiently to include them. Much better, however, is it to append as a schedule or statement in support of the balance sheet, a statement of surplus, showing therein the detail of all entries affecting it during and at the close of the current period. Particularly is this desirable when the statements of financial condition are prepared for internal use.
Such a statement of surplus should start with the amount of surplus as at the close of the previous period. Then the adjustments applicable to that period should be shown, thus determining the true surplus for the period. Following that should appear the entries made directly to Surplus for the current period, the net profit transferred thereto, and finally all appropriations of profit, leaving as the balance of Surplus the same amount which appears in the balance sheet. In skeleton form the statement should appear somewhat as follows:
X Y Z Company
Statement of Surplus, June 30, 1918
| Balance of Surplus as on December 31, 1917 | $..... | ||
| Adjustments applicable to period ending December 31, 1917: | |||
| Additions: | |||
| Inventory omissions, undervaluations, etc. | $..... | ||
| Items wrongly charged to Revenue | ..... | ||
| Over-estimate of Depreciation, etc. | ..... | ..... | |
| Deductions: | |||
| Inventory overvaluations, etc. | $..... | ||
| Items wrongly charged to Capital | ..... | ||
| Under-estimates of Depreciation, etc. | ..... | ..... | |
| Net Increase (or Decrease) | ..... | ||
| True Surplus as on December 31, 1917 | $..... | ||
| Extraordinary Profits (or Losses) this period | $..... | ||
| Net Profit this period | ..... | ..... | |
| Amount available for appropriation | $..... | ||
| Appropriations of Surplus: | |||
| Reserves (shown in detail) | $..... | ||
| Dividends | ..... | ..... | |
| Net Balance in Surplus as on June 30, 1918 | $..... | ||
CHAPTER XXIV
DIVIDENDS
Introduction
Dividends, as the term is generally used, may be defined as those profits of a corporation which are divided among the owners. Except in the case of wasting assets, the law is very explicit in limiting dividends to profits. Therefore profits need to be determined with painstaking care. Most of the major problems met in the determination of profits were discussed in Chapter XXII. Here it is purposed to limit the discussion to one phase of the disposition of profits, viz., as dividends, having treated in Chapter XXIII other appropriations of profit for reserves and surplus.
Disposition of Corporation Profits