Accumulated loss

What it means

An accumulated loss is the negative balance of past years’ profit or loss that the company has not yet covered from any source. It reduces equity and rolls forward year after year until it is settled.

An accounting loss is not the same as a tax loss, which may be carried forward against future tax bases. The first lives in equity, the second only in the return and in the tax administrator’s records.

Once the loss outgrows every other component of equity, equity turns negative and the assets in the books no longer cover even the liabilities. Negative equity is visible in the public statements, and banks, leasing companies and suppliers read it as a sign of weak creditworthiness well before anyone starts treating the company as a debtor.

How it works in practice

The loss is settled out of later years’ profits, from the reserve fund, from a shareholder contribution to the capital fund, or by reducing the registered capital. The general meeting picks the route when it approves the statements.

Once the loss pushes the ratio of equity to liabilities below eight to one hundred, the company is in crisis. Repaying loans from shareholders and related parties is then barred for as long as the crisis lasts.

In the papers for the general meeting we also propose how the loss should be settled. Most often it is simply moved to the account of accumulated losses of prior years; if a shareholder covers it with a contribution to equity, that contribution is not income of the company and genuinely reduces the loss in the balance sheet.

What to watch out for

A shareholder props up a loss-making company with a loan instead of a contribution. During a crisis that loan counts as funding replacing own resources: if the company repays it, the shareholder has to give the money back, and the director guarantees that return with personal assets.

An accumulated loss cannot be left in the statements without comment. If losses cast doubt on the going concern assumption, that has to be described in the notes; statements that stay silent about it are misleading, and in any later bankruptcy that silence is turned against the director.