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Why Accumulated Losses are treated as an Assets?


Date: 21 Jan 2010   Posted By: Aparna      Group: Finance and Investments    Category: Mutual Funds   

hi
In a business, the accumulated losses as on the date of Balance sheet(i.e. Profit&Loss A/C Cr balance)are shown in the Assets side treating the losses as an Assets of the business.
Please offer your comments.




Author: Ramnarayan Shah    24 Jan 2010      Member Level: Silver     Points : 4  (Rs 2)    Voting Score: 0

Accumulated loss is not shown as an asset; it is shown on assets side of balance sheet.

Profit is part of capital or net worth. If there is profit, then capital will increase and vice-versa.

Liability side balance sheet can be described as sources of fund. Capital and Profit are sources of fund. If there is loss, then it is application of fund. If you show on the loss on liability side then it is meant that it is sources of fund but actually because of loss resources will be reduced so it is illogical to show the accumulated losses on liability side.

Further, if losses are shown on assets side then it is meant that total assets will be reduced to that extent. Because Net Worth can be calculated by two different ways:
1) Net Worth = Capital + Reserves and Surplus – Miscellaneous Expenditures – Accumulated Losses
2) Net Worth = Total of Assets Side - Miscellaneous Expenditures – Accumulated Losses





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