Donated surplus is contributed cash, property, or stock that increases shareholders' equity without being earned revenue.
Donated Surplus refers to contributions of cash, property, or a company’s own stock that are freely given to the company by owners or other stakeholders. This type of contribution increases shareholders’ equity and is also known as donated capital. These contributions are recorded in a special account within the shareholders’ equity section of the balance sheet.
Donated surplus can take various forms, including:
Cash contributions increase a company’s liquidity and are recorded as an increase in cash and an increase in shareholders’ equity.
Contributions of property, such as land or equipment, are appraised at fair market value and added to the company’s asset base, with a corresponding increase in shareholders’ equity.
When a company receives its own stock from shareholders as a donation, it reduces the number of outstanding shares, adjusts the treasury stock account, and increases the donated surplus.
Here is an example of how donated surplus might be recorded in the accounting books:
Cash Donation:
Dr. Cash $X
Cr. Donated Surplus $X
Property Donation:
Dr. Equipment/Land/Other Asset $Y
Cr. Donated Surplus $Y
Stock Donation:
Dr. Treasury Stock $Z
Cr. Donated Surplus $Z
These journal entries ensure that the contributions are properly reflected in both the asset and equity sections of the balance sheet, preserving the accounting equation:
Startups often rely on such contributions from founders and early investors to establish a robust financial position.
Companies facing financial difficulties may receive donations from major stakeholders to help stabilize their operations.
While not exactly the same, non-profit organizations often receive donations that similarly need to be recorded despite their non-equity nature.