Losses

Definition

Losses represent the excess of expenses over revenues within a specific accounting period. They reflect a decrease in an entity's net assets and negatively affect its financial health.

5 Must Know Facts For Your Next Test

1. Losses are recorded on the income statement and reduce net income.
2. They can result from various factors including operational inefficiencies, market downturns, or extraordinary events.
3. Accrual accounting requires that losses be recognized when they are incurred, not necessarily when cash is exchanged.
4. Losses can impact a company's tax obligations by reducing taxable income.
5. They differ from expenses in that losses usually arise from peripheral or incidental transactions rather than primary business operations.

Review Questions

• How do losses impact an entity's net assets?
• Why must losses be recognized in accrual accounting even if no cash transaction has occurred?
• In what ways can recognizing losses affect a company's financial statements?

Related terms

Expenses: Costs incurred to generate revenue, often related to core business operations.

Revenue: Income generated from normal business activities such as sales of goods and services.

Net Income: The amount of profit remaining after all expenses and losses have been subtracted from total revenues.