Financial statements

[Subas]

What will happen to balance sheet if a company is incurring loss. I understand that the loss will reduce the retained earnings. But if there are no sufficient retained earnings/no retained earnings at all, how the loss will impact the balance sheet? Loss may have increase in debt on the liability side but how it can be balanced in the asset side? pls clarify.

 

[S2000magician]

Negative retained earnings.

 

[Oscar]

Correct, and just thinking this further: assume the starting equity is zero
negative retained earnings –> negative equity –> negative net assets –> this indicates an indirect (!) liability of the equityholders towards the company (in this case towards the liabilityholders as there are not enough assets to cover the liabilities) –> If equityholders do not balance the gap this is equal to bankruptcy where the liabilityholders will claim the residual assets.

 

[Gergely]

Negative RE can be financed by capital reserved or any other parts of the Owner equity till the dedicated limit.

 

[Olayeancah]

A loss would reduce the retained earnings which in turn would hit the share capital; Thus reducing the shareholders fund.
Also, Remember, Equity (E) = Asset (A) - Liabilities (L)
Simply, Equity Fund comprises Share capital plus retained earnings carried forward from inception.