Net loss definition

What is Net Loss?

Net loss is the excess of expenses over revenues. All expenses are included in this calculation, including the effects of income taxes.  For example, revenues of $900,000 and expenses of $1,000,000 yield a net loss of $100,000. Net losses are expected for a start-up business. However, a business must eliminate its net losses soon, or risk using up its cash reserves and going out of business.

Factors Causing a Net Loss

Net losses are commonly experienced when a business is just starting up; in this situation, expenses must be incurred to operate the business and create new products, while there may be few sales. Net losses can also be caused by increased competition that leads to reduced sales, increases in expenses due to material or compensation costs, and the interest costs of any debt incurred to finance the business.

Related AccountingTools Course

The Interpretation of Financial Statements

Impact of Net Losses on Income Taxes Owed

The net loss concept is useful for determining the amount of income taxes owed, since a net loss in one period can be used to offset the taxable income in another period, resulting in a reduced income tax liability.

Net Loss vs. Net Profit

A net loss occurs when there is an excess of expenses over revenues, while a net profit occurs when there is an excess of revenues over expenses.

Presentation of Net Loss

The net loss appears at the bottom of the income statement, after all line items associated with revenues and expenses. A sample presentation of a net loss is highlighted in the following exhibit, which contains an income statement.