Accumulated Deficit
What is Accumulated Deficit?
Accumulated deficit is a negative retained earnings account balance, resulting from continual losses.
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How it Works
During an accounting period, a business will earn income.
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It will also incur expenses.
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Providing income is greater than expenses, it will make a profit.
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The profit is recorded in the profit and loss account.
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Then it is shown in your period end reports.
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After that, it is transferred to the retained earnings account.
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The retained earnings account is an equity account.
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Equity accounts show how much money the business owes to the owner.
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By crediting the retained earnings account, you will increase the account’s balance.
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This shows the owner is owed the current profit, as well.
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So long as the business continues to make profits, the retained earnings account’s balance will keep growing.
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However, a business can also make a loss.
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The loss will give the profit and loss account a credit balance.
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This means retained earnings will be updated with a debit balance.
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If the business continues to lose money, these losses will accumulate.
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Eventually, the account will contain more losses than profits.
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At this point, the account’s balance is referred to as accumulated deficit.
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