Definition: Net loss, also called loss, refers to a company’s financial position when total expenses exceed total revenues. In other words, net loss is the amount of money the company lost during the period. This is the negative amount of cash that is left over after all the expenses have been paid during the period. If total revenues were greater than total expenses, the company would have net income instead of net loss. Net loss is calculated by subtracting total expenses from total revenues.
What Does Net Loss Mean?
Net loss appears at the bottom of the income statement or profit and loss statement after all of the cost of goods sold and operating expenses have been subtracted out. This is why many people call net loss the “bottom line.”
Net loss is also a good example of the matching principle. All revenues and expenses are matched for the given period. This means that all expenses that relate to income earned in the period must be included in the period regardless of whether the expenses were actually paid. Expenses that are incurred in the period but not paid are often called accrued expenses.
Payroll wages are a good example of accrued expenses. Employees working in December 2015 might not actually get paid until January 2016. These wages are related to the revenues earned in 2015, so the expenses should be matched with the 2015 revenues. The payroll wages are accrued at the end of 2015 and appear on the 2015 profit and loss statement lowering the net loss for the year. There are many other accrued expenses and even some unearned revenue accounts that affect net loss and also reflect the matching principle.