Retained loss definition
/What is a Retained Loss?
A retained loss is a loss incurred by a business, which is recorded within the retained earnings account in the equity section of its balance sheet. The retained earnings account contains both the gains earned and losses incurred by a business, so it nets together the two balances. Thus, obtaining the cumulative retained losses of a business can be difficult to derive, unless the business has incurred nothing but losses since its inception.
If a business has a cumulative retained loss (also known as negative retained earnings), it has a debit balance in the retained earnings account. The account normally has a credit balance, which is caused by the cumulative generation of profits over time. If a corporation has a retained loss, this does not mean that the shareholders must pay the amount of the loss to the company; shareholders are only liable for their initial investment in the business, so the company may have to offset its retained losses by other means, such as reducing its investment in working capital, selling more shares to investors, and obtaining loans from lenders.
Example of a Retained Loss
As an example, a startup company generates a loss of $5 million during its first few years of operation, as it develops products and spends money on marketing. This initially results in a retained loss, which it gradually reduces over time as subsequent profits from the maturing product line gradually build its profits.
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Impact of Retained Losses on Investment Decisions
A retained loss should be of concern to an investor if a company has been in business for a long period of time, since it indicates that the entity has struggled to find a consistent strategy for earning a profit. However, this is not necessarily the case for a startup company, which is expected to incur losses as it rolls out its initial products and services and attempts to gain market share. The latter situation may make particular sense if the intent is to build a product or customer base and then sell the company based on the prospects of the business, rather than its proven profitability.
Impact of Dividends on Retailed Losses
A retained loss is only caused by expenses being greater than revenues. It is not caused by the issuance of a dividend to shareholders.
Terms Similar to Retained Loss
A retained loss is also known as an accumulated loss or an accumulated deficit.
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