In preferences, if I set the surplus to “Spend surplus money”, what is assumed?

If ‘Spend Surplus money’ is selected, then income received that is above the required income will be considered to be spent. If there is a shortfall in meeting the target expenses, it will be met from assets. 

Surplus capital is treated differently. Surplus capital from the sale of a property, receiving a windfall, or PCLS will be saved into a cash deposit.