Dirty Surplus Accounting

Dirty Surplus Accounting is the process of reporting income items as part of equity rather than in an income statement is known as dirty surplus accounting. When only net income reported in the equity statement from income statement called clean-surplus accounting. Under dirty surplus accounting the income in the income statement is not “Clean”. For example, when other operating income which in net of tax is directly reported to the equity statement though that would be reported in the income statement with the heads other operating income.

Dirty surplus items include-  a) Operating income items, b) Financing income or expense items, c) Balance sheet items including deffered compensation relating to grant of employee stock options and stock dividend payable.

Dirty-Surplus may arise from unrealized gains and losses on securities available for sale. There are three types of securities-

  • Trading Securities: Securities which is traded actively in the market. The marked to market value of these securities are reported in the balance sheet as a portion of equity, but if the market price change of that securities and incur a gain or loss this amount will be reported in the income statement.
  • Securities available for sale and securities held to maturity which is not actively traded. This also is reported in the balance sheet as marked to market. Any type of gain or loss should be reported in the equity statement it is an example of Dirty Surplus.

When the exchange rate of two countries differs from the previous period it would be incurred a gain or loss. This is referred to as foreign currency translation gain or loss. This type of gain or loss is reported as net income and can be used as other comprehensive income in the equity statement.

When this gain or loss and gain or loss arises from derivative instrument is an example of dirty surplus.

Reported dirty-surplus is solely depends on the company and their industry practice. It is varied upon company to company.

So, “the income of equity portion of the balance sheet is always dirty surplus”.                                                                                                                                                                                                                                                                                                                           

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