Debitoor's accounting dictionary

Losses - What are losses?

Losses are a one-time removal or decrease in a business resource or asset. Losses are unrecoverable and unanticipated

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The most common types of loss refer to the amount that an asset decreases in value over the course of its useful life for your business. All fixed (long-term) assets suffer from depreciation over time, and the differences in these value is what is referred to as loss. These assets do not include any inventory sold.

Another common type of loss can also mean that the total expenses encountered by a company is greater than the income for a particular period. This is more specifically known as ‘net operating loss’ or simply ‘net loss’.

When a loss occurs

While the more well-known situations wherein losses are experienced are mentioned above, there are a variety of other circumstances in which a company can face losses. In accounting, losses occur in any of the following situations:

  • costs that produce no benefit
  • decrease in value of resources
  • excess of expenditure over income
  • excess of cost over net proceeds from a transaction
  • contingent losses as a result of lawsuit or unexpected events

Recording losses for financial statements

It is important to keep thorough financial records for your business, and while losses aren’t necessarily a pleasant element to include, they are nevertheless crucial for maintaining balanced and legal accounts.

Losses are recorded and displayed in one of two reports, depending on the type of loss:

  • Losses that result from events that are not related to the primary operations of a business are recorded in the profit and loss statement.

  • Losses that do result from events that are directly related to the operations of the business are recognized in the balance sheet.

The impact of losses

While losses are not a positive addition to a company’s finance, there is no reason that a loss should spell the demise of the business. However, repeated net operating loss over an extended period of time can result in insolvency, which may require eventual liquidation.

Many businesses can bounce back from a net operating loss using previous revenue or relying on loans such as a small business loan, for example. But these companies will need to develop a long-term plan to try to turn things around.

Losses due to asset depreciation, even to capital assets such as real estate, mean that these assets are worth less than their original purchase price. This can be due to poor market performance, or a weak economy and must be taken into account in the financial reporting of a business.

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