An accumulated deficit is a negative retained earnings balance. This deficit arises when the cumulative amount of losses experienced and dividends paid by a business exceeds the cumulative amount of its profits. An accumulated deficit signals that an entity is not financially stable, since it requires additional funding. However, this may not be the case for a startup business, where substantial initial losses are expected before sales begin to take off.
For example, an organization generates $100,000 of profits, pays out $25,000 in dividends, and then experiences $150,000 of losses. Its accumulated deficit is calculated as:
$100,000 Profits - $25,000 Dividends - $150,000 = $75,000 Accumulated deficit