What is a Deficit?

A deficit is when the business loses money to the extent that the retained earnings account gets a debit balance.

How it Works

A business will make a profit if its income exceeds expenses by period-end. 

You show this profit in the period-end statement. 

When preparing the period-end reports, you transfer profit to the retained earnings account.

You transfer the profit by crediting the retained earnings account and debiting the profit and loss account.

Providing the business continues to make profits and the money is left in the business, the retained earnings balance will grow and grow. 

However, the business may make a loss. 

In this case, the profit and loss account will have a credit balance. 

So when you transfer its balance to retained earnings, you record the loss with a debit.

Losses will reduce the retained earnings account’s balance.

If the business continues to lose money, eventually, the retained earnings account will end up with a debit balance. 

At this point, the retained earnings account is said to be in deficit.