Meanings of Annual Deficit

Meanings of Annual Deficit

Depending on whether or not they are required to keep double-entry entries, companies must prepare a balance sheet and an income statement or an income statement . This shows whether the company made a profit as a net profit or a loss as a net loss. If a company often has an annual deficit , the company is at risk of insolvency.

Definition of the annual deficit

According to, the annual deficit is a term used in the balance sheet and profit and loss account of corporations . It results from the excess of expenses over income within a financial year . When determining the annual deficit,

  • Profit or loss carried forward
  • Withdrawals
  • Recruitment from or into open reserves

not taken into account. In tax law, the annual deficit is referred to as a loss.

Determination of the annual deficit

In order to determine the annual deficit, all income and all expenses within a period, usually within a fiscal year, must first be added up. It is determined by subtracting the expenses from the income. The result is negative. If the result were positive, it would be a profit for the year. In order to determine the annual deficit, all income and expenses for a current period must be taken into account. The net loss for the year includes the result from normal business activities in the form of the operating and financial results as well as extraordinary income and expenses and the effects of taxes on income and earnings. Profit carry-forwards are in the annual deficit or loss carry forwards from the previous period, transfers to open reserves or withdrawals from reserves not yet taken into account. These items are only included in the balance sheet loss while the annual surplus is being carried forward. To a balance sheet profit or balance sheet loss to determine, the annual deficit is taken as the basis; Profit or loss carry forwards from the previous year are added or subtracted, withdrawals from the capital reserve are added, withdrawals from the profit reserve are also added and adjustments to the profit reserve are subtracted. The result is a balance sheet profit or balance sheet loss. If the balance sheet is drawn up before the profit appropriation, the net loss for the year must be shown in the balance sheet as part of equity;
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The annual deficit in the income statement

The net loss for the year is a loss and can be found last in the income statement . It is the negative business result for a financial year and represents the difference between expenses and income. However, it can be influenced. Earnings can be improved through the sale of assets and the release of hidden reserves . In order to exclude such special effects in the balance sheet analysis, it is possible to determine the adjusted net income.

Effects of the annual deficit

Since an annual deficit is a surplus of expenses, it leads to a reduction in equity. In the worst case scenario, this can result in negative equity arise. In contrast to the annual surplus, which in the case of a corporation can be distributed to the partners, an annual deficit cannot be distributed to the partners. He must remain in the company. If profits were achieved in the previous year in the form of an annual surplus, the annual deficit can be offset against this. Due to these offsetting, this can even be converted into a balance sheet profit under certain circumstances, so a distribution to the shareholders is possible despite a negative result. If there is an annual deficit for several years in a row, the company is threatened with bankruptcy. At some point it is no longer possible to compensate for the annual deficit, as the reserves are no longer sufficient.

Presentation of the annual deficit in the balance sheet and in the income statement

The annual deficit is shown in the balance sheet and in the income statement if the use of the result is excluded from the annual financial statements. This is the case if the annual financial statements are prepared without using the annual results. In the income statement, the net loss for the year is shown under the item net income / net loss. It can also be shown under the item “Net profit / net loss”. In the balance sheet, it can be shown in capital as a fixed variable with a negative sign.

The amount is calculated from the formula annual result = income-expenses, provided that the sum of the expenses of an accounting period exceeds the sum of the income. Example: In one fiscal year, income of € 100,000 is achieved, whereas the after-tax expenses add up to a total of € 150,000. Using the formula listed above, this results in an annual result of € -50,000, i.e. an annual deficit of € -50,000. The net loss for the year reduces equity in the balance sheet. However, this can be covered by own reserves or by a loss carried forward from the previous year. This can be useful when it comes to the presentation of key figures in the balance sheet or the possibility of distributing a dividend as a shareholder.

Annual Deficit