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Simple English definitions for legal terms
restricted surplus
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A quick definition of restricted surplus:
Restricted surplus is a type of surplus that has limitations on how it can be used. It is usually a portion of the company's retained earnings that cannot be distributed as dividends due to preferred dividends in arrears, a covenant in a loan agreement, or a decision made by the board of directors. In simpler terms, it's like having extra money, but you can't spend it on whatever you want because there are rules on how it can be used.
A more thorough explanation:
Definition: Restricted surplus is a surplus with a limited or restricted use. It is the portion of retained earnings that cannot be distributed as dividends. The restriction is usually due to preferred dividends in arrears, a covenant in a loan agreement, or some decision of the board of directors.
- If a company has $100,000 in retained earnings, but $20,000 of it is restricted surplus, the company can only distribute $80,000 as dividends to its shareholders.
- A company may have a loan agreement that restricts the use of retained earnings until the loan is paid off. In this case, the portion of retained earnings that is restricted would be considered restricted surplus.
These examples illustrate how restricted surplus is a portion of retained earnings that cannot be distributed as dividends due to certain restrictions or agreements. It is important for companies to keep track of their restricted surplus to ensure they are not violating any agreements or covenants.