Net Loss

A net loss is the bottom-line result on the income statement when a business's expenses, losses and taxes for a period are greater than its revenues and gains. It is the negative counterpart of net income and is often shown in parentheses or with a minus sign. A net loss reduces owners' equity: in a corporation it lowers retained earnings or adds to an accumulated deficit, and in a partnership or sole proprietorship it reduces the owners' capital accounts.

A net loss for a single period does not necessarily mean a business is failing. Start-ups, companies investing heavily in growth, and businesses hit by one-off charges often report losses while their underlying prospects remain sound. Persistent losses, however, consume cash and equity and can eventually raise doubts about whether the business can continue as a going concern.

The calculation is the same as for net income:

Here $\text{Revenues}$ and $\text{Gains}$ are the inflows of the period, and $\text{Expenses}$ and $\text{Losses}$, including income tax expense, are the outflows and costs. When the result is negative, it is a net loss. A loss can arise at any level of the income statement: a company can have positive gross profit and operating income but still report a net loss because of heavy interest costs, a large impairment, or losses from discontinued operations.

A software start-up reports revenue of $4,500,000 in its second year. Its cost of revenue is $1,200,000, research and development costs $2,800,000, sales and marketing $1,900,000, and general and administrative expenses $700,000. It also earns $100,000 of interest income on its cash. Total expenses are $6,600,000, so the result before tax is a loss of $2,000,000. Because it has no taxable income and its future profits are uncertain, it records no income tax benefit. Its net loss is $2,000,000.

At year end, the company closes its revenue and expense accounts into the income summary account, which shows a debit balance of $2,000,000. The closing entry debits retained earnings and credits income summary by $2,000,000. If the company started the year with an accumulated deficit of $1,500,000, its accumulated deficit is now $3,500,000. With 10,000,000 shares outstanding, its loss per share is $0.20, reported as negative earnings per share.

For US federal income tax, a business whose deductions exceed its income has a net operating loss (NOL), which is calculated under tax rules and can differ from the book net loss. Under rules introduced by the Tax Cuts and Jobs Act of 2017, NOLs arising after 2017 can generally be carried forward indefinitely and used to offset up to 80 percent of taxable income in a later year, while carrybacks to earlier years are generally no longer allowed. For accounting purposes, the future tax benefit of an NOL is recorded as a deferred tax asset, reduced by a valuation allowance if it is more likely than not that the company will not earn enough taxable income to use it. That is why the start-up in the example records no tax benefit.

• Cash versus accounting loss: a net loss may include large noncash charges such as depreciation, amortization, share-based pay or impairment, so operating cash flow can be positive even when the company reports a loss.
• One-off versus recurring: analysts separate restructuring costs, write-downs and legal settlements from the ongoing results of the business.
• Funding runway: for loss-making companies, the key question is how many months of losses their cash and available credit can cover.
• Going concern: repeated losses that erode equity may lead auditors to evaluate substantial doubt under the going concern assumption and add a paragraph to the audit report.

The general idea of a loss in accounting, including losses on individual transactions, is covered in the entry on losses, and the ways businesses track the resulting tax position are explained with guidance from the Internal Revenue Service.