Accumulated losses – What is it, definition and concept

Accumulated losses correspond to a correction in accounting with respect to previous years or years. This, when said modification produces a negative result in the results of the company.

In other words, accumulated losses are rectifications made for events that occurred in previous years (or that affect these previous periods), and that generate a reduction effect on the company’s results.

Accumulated losses can occur, for example, due to changes in accounting standards or errors detected today in the balances of previous years.

Then, these changes or identified facts can be considered, for their effects, in the current exercise.

To understand it more clearly, let’s say that when balancing a company in 2020, the accountant finds an error in the 2019 balances, for example, a loss that was not included due to lost inventory. This can be included in the 2020 financial year as an accumulated loss.

At this point, we must remember that the accounting loss is a decrease in the assets (goods and rights) of a company.

Accumulated losses on the balance sheet

The accumulated losses are a subaccount of the accumulated results. These are those profits or losses on which the partners of the company have not made a decision.

For accounting entries of accumulated results, the following dynamic is followed:

A debit is recorded when:

  • Adjustments from previous periods are given and these correspond to higher losses or lower profits.
  • Loss is reported for the current period.
  • The application of profits as dividends or appropriation to reserves.
  • Losses generated by changes in accounting standards and accounting errors.
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A credit is recorded when:

  • Adjustments from previous periods are given and these correspond to higher profits or lower losses.
  • Profits are recorded in the period.
  • Coverage of a loss is made.
  • The profits generated by changes in accounting standards and accounting errors.

The accumulated results, and therefore the accumulated losses, are part of the equity, within the balance sheet. Therefore, a debit represents a decrease in the balance in the account, while a credit, on the contrary, means an increase.

Example of accumulated losses

Suppose that the UHY company forgets in 2020 to record a payment to one of its suppliers for 5,000 euros (neither the existence of the service received nor the payment made was recorded). The following year, upon identifying the error, the firm could recognize the omission with the following entry in the 2021 accounts:

Accumulated results 5,000
Debts to pay 5,000
Debts to pay 5,0000
Box / Banks 5,000

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