Sign Up for Discounts
This form does not yet contain any fields.
    Sunday
    Dec192010

    What are negative retained earnings?

    When a company records a profit, the amount of the profit, less any dividends paid to stockholders, is recorded in retained earnings, which is an equity account. When a company records a loss, this too is recorded in retained earnings. If the amount of the loss exceeds the amount of profit previously recorded in the retained earnings account as beginning retained earnings, then a company is said to have negative retained earnings.

    Negative retained earnings can arise for a profitable company if it distributes dividends that are, in aggregate, greater than the total amount of its earnings since the foundation of the company.

    Negative retained earnings appear as a debit balance in the retained earnings account, rather than the credit balance that normally appears for a profitable corporation. On the company's balance sheet, negative retained earnings are usually described in a separate line item as an "Accumulated Deficit."

    Negative retained earnings can be an indicator of bankruptcy, since it implies a long-term series of losses. In rare cases, it can also indicate that a business was able to borrow funds and then distribute these funds to shareholders as dividends; however, this action is usually prohibited by loan covenants.

    Related Topics

    What are retained earnings?
    What are the stockholders' equity accounts?
    What is a capital surplus?
    What is earned capital?
    What is the retained earnings formula?

    PrintView Printer Friendly Version

    EmailEmail Article to Friend

    Reader Comments

    There are no comments for this journal entry. To create a new comment, use the form below.
    Editor Permission Required
    You must have editing permission for this entry in order to post comments.