Clean surplus concept definition

What is the Clean Surplus Concept?

The clean surplus concept splits the operating performance of a business from its financing activities. The concept is useful for understanding the sources of a firm’s profits and losses. In essence, earnings can come from two sources, which are as follows:

• Earnings retained in the business. This is an organization’s net income, minus any dividends that have been distributed to shareholders. These earnings are part of a firm’s clean surplus, since they are earnings from the business that have been reinvested in it.

• Other comprehensive income. This is comprised of changes in equity related to unrealized gains and losses in such areas as the value of marketable securities and foreign currency holdings. These variations are not related to the operations of the business, and so are sometimes characterized as a dirty surplus.