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Accumulated Deficit on Balance Sheet

Accumulated deficit is the total net loss of business. If company's income is less than its expenses and losses, it will transfer to accumulated deficit account and same deficit will transfer to balance sheet. In balance sheet, it will deducted from stockholders' equity.


Simple Formula of Calculation of Accumulated Deficit

AD = Opening Balance of Net Loss - ( Net Income in this year - Total Dividend - Transfer to Reserve )

Adjustment in Balance Sheet

Liabilities Side

Stockholders' equity

Less accumulated deficit

---------------------------------------

Adjusted stockholders' equity

=======================


Example

ABC company has obtained net profit in 2015 $ 40000. At opening of this year, it has $ 60000 balance of net loss. Dividend paid is $ 10000. Total stockholders' equity $ 500000


Total accumulated deficit = $ 60000 - ($ 40000 - $ 10000)

= $30000


Balance sheet

Liabilities Side

Stockholders' equity       $ 500000

Less accumulated Deficit $ 30000

------------------------------------------

$ 470000

========================



Side-Effect of Accumulated Deficit Figure on Balance Sheet

If there is increasing trend of accumulated deficit on the balance sheet, it will be harmful for financial health of company. Company has invested the money in the business but same business is generating losses. It means, our invested capital is decreasing day by day. Due to this, whole assets value will decrease. Due to this, whole market value of business will decrease. If same trend will continue, one day, company's business will stop due to bankruptcy.

Related : Retained Earning

COMMENTS

: 1
  1. Sir i need ur help that how i prepare provisional balance sheet of pvt.ltd company
    End of march 17

    ReplyDelete
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Accounting Education: Accumulated Deficit on Balance Sheet
Accumulated Deficit on Balance Sheet
Accounting Education
https://www.svtuition.org/2015/06/accumulated-deficit-on-balance-sheet.html
https://www.svtuition.org/
http://www.svtuition.org/
http://www.svtuition.org/2015/06/accumulated-deficit-on-balance-sheet.html
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