Accounting loss

In financial accounting, losses are "decreases in equity (net assets) from transactions and other events and circumstances affecting an entity, except those that result from expenses or distributions to owners. Losses are typically associated with four situations: nonreciprocal events, nonreciprocal transactions, exchange transactions, and holding losses."

1. "Nonreciprocal events " can be natural catastrophes earthquake, fire or flood, but can also include armed conflicts, traffic accidents or theft. Their defining feature is that they are nonreciprocal (the reporting entity does not receive anything of measurable economic value in return) and generally beyond the control of the entity reporting the loss.
2. "Nonreciprocal loss transactions" are rarely recognized in practice. For example, a charitable contribution is a nonreciprocal transaction as the giver does not receive anything (other than a feeling of doing good) in return. However, when companies make charitable contributions, they recognize them as expenses not losses. Likewise, taxes, fees or penalties are also nonreciprocal but again companies recognize these expenditures as expenses. In contrast, nonreciprocal gain transactions are fairly common. For example, if a company receives a government grant, it would recognize this nonreciprocal receipt as a gain.
3. "Exchange gain transactions" are incidental to an entity's operations. For example, when an entity sells a machine it manufactured for sale, it recognizes the cost of the machine as an expense (the amount received in the sale is recognized as revenue). If, on the other hand, the entity sells a machine previously used in production, it recognizes a loss if it receives less for the machine than its depreciated value (Depreciation).
4. "Holding losses" result from changes in value of assets and liabilities held by an entity. Many of these losses are only recognized when the asset is disposed of or liability extinguished. For example, a company buys a production machine with a useful life of 10 years for CU1000. At the end of year 1, the market value of the machine is CU800. At the end of year 2, the company sells the machine for CU600. At the end of year one, the company would not recognize a loss but a depreciation expense of CU100. At the end of year 2, it would again recognize a depreciation expense of CU100 and a loss of CU200. In contrast, some holding losses are recognized during the holding period. For example, a company buys a market traded security for CU1,000. At the end of year 1, the market value of the security is CU800. At the end of year 2, the company sells the security for CU600. It would report a holding loss (unrealized) of CU200 in year one and another loss of CU200 in year 2. Occasionally, holding losses are reported as expenses. For example, FASB concept statement 8 chapter 4 paragraph E89 states that when holding losses are fundamental to an entity's operations, they should be recognized as expenses rather than losses.

Unrealized losses: while US GAAP (for example ASC 321-10-35-1) uses the term "unrealized holding gains and losses" IFRS (IFRS 9) avoids labeling any changes in fair value as "unrealized".

References

This article "Accounting loss" is from Wikipedia. The list of its authors can be seen in its historical and/or the page Edithistory:Accounting loss. Articles copied from Draft Namespace on Wikipedia could be seen on the Draft Namespace of Wikipedia and not main one.

📰 Article(s) of the same category(ies)

• Income per user
• Comparison of management accounting and financial accounting
• Nexia International
• Junior accountant
• Accounting
• Ledger
• Depreciated value

---