What is the Purpose of Parentheses in Accounting?

In accounting, parentheses are commonly used to indicate negative values, losses, or deductions in financial statements. This notation is especially useful in reports such as the income statement, where expenses, net losses, or reductions in revenue are often presented in parentheses to distinguish them from positive figures. For example, if a company reports net income of $50,000 but also shows (10,000) under expenses, it signifies a $10,000 deduction from earnings. Similarly, on the cash flow statement, a number in parentheses represents a cash outflow, such as (5,000) for operating expenses, indicating money spent rather than received. This formatting helps users of financial statements quickly identify areas of financial concern, such as losses, overdrafts, or negative cash flows, improving clarity and decision-making.

When to Use Parentheses in Accounting

In accounting, there are several situations in which it is common practice to put parentheses around numbers. It should be used in the following situations:

When one number is being subtracted from another number
When presenting a negative number in a statement or report
When stating the meaning of a negative amount in a line item description, such as “Net profit (loss)” in the bottom line of an income statement
When presenting the credit side of a journal entry
When presenting an unfavorable budget variance, such as when actual sales are less than budgeted sales
When presenting an account balance that is the reverse of its normal position, such as when an account with a normal debit balance has a credit balance instead