The balance sheet loss is the counterpart to the balance sheet profit. A reported balance sheet loss does not automatically mean that the company is in trouble. In this article, we will work out in detail what the subtle differences are.
Balance sheet loss and net loss for the year – definition and distinction
The balance sheet profit and balance sheet loss are relevant whenever the annual financial statements are drawn up after partial use of the profit . This also explains the difference to the annual surplus or the annual deficit , because these terms would be used in the annual financial statements before the profit appropriation. The two terms must therefore be clearly distinguished, as otherwise misunderstandings about the company’s situation can arise.
The actual profit or loss is of course still determined off the balance sheet, in the profit and loss account. If there is an annual deficit , the balance sheet loss comes into play. Because if the annual deficit cannot be compensated for by retained earnings or a profit carried forward from previous years, a balance sheet loss in the corresponding amount must be shown on the assets side of the balance sheet.
The balance sheet loss then also has a corresponding effect on the balance sheet for the following year.
The balance sheet: profit & loss
The balance sheet and the profit and loss account are basically separate processes that are both part of the annual financial statements . The actual result is determined in the profit and loss account . The balance sheet, on the other hand, compares all items, sorted by account class and subdivided into assets and liabilities .
The result of the income statement is thus either an annual surplus or an annual deficit. Profit and loss are included in the balance sheet in such a way that these items are carried over to the next year in the form of profit or loss carryforward in order to ensure that the sums are equal. At the same time, the value published here also serves to show externally that the company can, for example, survive a bad financial year in which an annual deficit is achieved, as there are high profit carryforwards. Put simply, this value corresponds to reserves that are accumulated in the company from the profits generated.
However, especially with start-ups, there are often no reserves from previous years that could be used to compensate for a shortfall. In this situation, the company’s share capital is used. In order that this is not reduced too much or even used up, investors are typically necessary who carry out a corresponding capital increase and thus ensure the continued existence of the company.
How is the balance sheet loss calculated?
The best way to understand the balance sheet loss is by simply showing the calculation of the value. This is very simple and also illustrates well the difference or connection to the profit and loss account.
Annual surplus or annual deficit are the starting point for the calculation. Any profit or loss carried forward is added first.
Withdrawals from existing reserves are deducted, newly allocated (“adjusted”) reserves are added. The result is the balance sheet profit or the balance sheet loss.
The relevant values are therefore only the annual surplus (or deficit), the profit carried forward (or loss carried forward) and the existing reserves (or the allocation to the reserves).
The calculation at a glance:
Annual surplus or annual deficit
+ profit or loss carried forward
+ withdrawal from reserves or – inflow to reserves
Result: net profit or loss
The calculation shows that a balance sheet loss is also possible if there is an annual surplus. This is the case if a loss carryforward from previous years exceeds the annual surplus. The reverse case is equally conceivable.
Balance sheet loss – example
Let’s imagine a company has had bad numbers in the past few years. There is therefore a loss carryforward of € 300,000. In the current financial year things went uphill, an annual surplus of € 200,000 was achieved. Despite the high annual surplus, there is a balance sheet loss of € 100,000 as the corresponding loss carryforwards are still available.
Another example would be if the company has done very well in recent years. Revenue reserves of € 100,000 could be formed. This year the business is worse, there is an annual deficit of € 40,000 in total. The revenue reserves are thus reduced by € 40,000, but despite the net loss for the year, there is no balance sheet loss, as this could be averted by the existing reserves.
Post balance sheet loss
If a loss carryforward is to be posted, this is done first on the “Loss carryforward before use” account . The corresponding offsetting entry then relates to the “Balance carried forward – G / L accounts” account .
When booking, it should be noted that amounts of up to one million euros can be carried forward without restriction. A higher loss can be offset against 60% of the remaining income. So this limit is usually not a big issue for small and medium-sized companies.
Another hurdle is more relevant, namely the fact that a change of shareholder can jeopardize the posting of a loss carryforward. If shares of at least 25% of the company have been sold within the last five years, losses that were previously incurred cannot be carried forward.
Let’s also take a look at the posting of a loss amount that can be seen in the income statement. If the income statement shows a loss as a result, this is shown in the equity account. The company’s equity is therefore reduced by the amount of the loss, which in the worst case scenario can lead to negative equity . As a result, the equity account is now closed, the balance is again transferred to the balance sheet and the accounting cycle finally closes.