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 company. 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 stockholders as dividends; however, this action is usually prohibited by a lender's loan covenants.