What is an accumulated deficit?

Definition

An accumulated deficit is the equity profit bucket after lifetime losses have erased lifetime profits. On the books, it remains an Equity account on the Balance Sheet, printed as a negative number.

Cash-basis and accrual books both keep this running total. Accrual losses can include unpaid bills and sales not yet collected, so the line can fall even when the checking account has not.

This line is not a loan and not a hole in the bank. A business can show an accumulated deficit while still holding cash and other assets.

Where it shows up

Balance Sheet: Located in the equity section.

P&L: Related to cumulative losses that wiped out kept profits.

See also: Retained Earnings · Equity · Net Income

On the Balance Sheet, the line sits in equity with the other residual accounts. Some software still labels it retained earnings and prints parentheses; other systems rename it when the balance turns negative.

The Income Statement shows one period's result. A net loss deepens the deficit after close, while the Statement of Changes in Equity walks the beginning balance to the ending balance. Posting a loss does not by itself move cash.

How it works

The balance arrives through closing entries. Revenue and expense accounts are cleared, and a net loss is posted against the equity profit bucket.

The close process is:

• Start with the prior ending retained-earnings balance.
• Add the period's profit or subtract its loss.
• Subtract distributions or other payouts.
• Reconcile the ending amount to the Balance Sheet.

A later net profit reduces the deficit. Enough profits can return the line to positive retained earnings. A distribution is not an expense; it is equity leaving the business and can make the residual more negative.

Example

A coffee roaster begins the year with positive retained earnings. During the year it records an $11,000 net loss after a slow season and a major equipment purchase.

After the close, the equity profit line becomes an accumulated deficit. The year-end close of the loss is recorded:

Debit: Retained earnings $11,000

Credit: Income summary $11,000

The residual profit bucket falls by $11,000, and the P&L accounts are cleared. The Income Statement still shows the loss for the year; this entry parks that result in Equity. Cash may differ because some costs may be unpaid or some cash may have been used for other transactions.

A later profitable period reduces the deficit, but only profits large enough to offset prior losses return the balance to positive retained earnings.

Common mix-ups

An accumulated deficit is not a bank overdraft. Cash is an asset; this line is cumulative kept profit gone negative.

An accumulated deficit is not this year's net loss. Net loss is the period result; this line includes prior periods and payouts.

An accumulated deficit is not a liability. Liabilities are owed to outsiders; this line is the owners' residual after liabilities are subtracted from assets.

Related terms

• Retained Earnings: Cumulative profits kept in the business rather than paid out.
• Net Income: What is left from revenue after every expense, including interest and taxes, is subtracted.
• Equity: The owners' residual claim on the business after liabilities are subtracted from assets.
• Statement Of Changes In Equity: A statement reconciling beginning and ending owner equity for the period.
• Book Value: The equity value carried on the balance sheet rather than a market value.
• Balance Sheet: A statement showing what a business owns, what it owes, and what is left for owners at a single point in time.
• Closing Entries: The year-end entries that clear income and expense accounts into retained earnings.
• Cash Burn: The net cash consumed by the business over a period.