July 5, 2020


Accounting + Finance Blog

Meaning of loss in accounting and key Explanations

Meaning of loss and key Explanations

Profit or loss is the risk of doing business. Although profit will bring a smile to the businesspersons face, the loss will do otherwise. The loss also has a special relationship with gains. In this article, we will focus on the meaning of loss. In the next one, the differences between gain and loss will be examined.

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Definition of loss

Loss is the excess of expenses over income.

Loss is an expense that arises from the excess of cost over the disposal of an item.

IFRS conceptual framework does not give a definition of loss.

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Key Explanations

The following can be deduced from the definition above.

Loss is an expense. Loss can be classified as expenses in certain cases in accounting.

For example, a firm can make a capital loss from investing in the stock exchange on a short term basis. If the shares were 10 Naira as of at the buying date and the entity decided to sell the shares today to meet operational obligations. But the share’s current price is 9.90 Naira. In this situation, the firm will make a capital loss of 0.10 Naira.

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Another example is when a firm disposes off itd physical assets. If the disposal amount is less than the remaining (residual) amount, it results in a loss. To illustrate, a firm decided to sell its Machine for 30,000 Naira. However, the residual value was 27,000 Naira. The loss of disposal of the Machine is 3,000 Naira.

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A third way to see loss as an expense is in terms of foreign exchange (FX) loss. A firm may face FX loss if the reporting currency (currency at which the firm reports its financial statement) is devalued when a transaction is completed.

It can be explained this way. A company whose reporting currency is Naira plans to pay for the importation of raw material in Dollars at the current FX rate of 360 Naira. If the raw material is brought at the current rate in Naira, the company will pay 360,000 Naira.

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However, the FX rate skyrocketed to 400 Naira to a Dollar at the time of the deal. This means that the company would have to pay 400,000 Naira. Therefore, a loss of 40,000 Naira to Foreign exchange.

Loss in this category is stated as a separate line item in a statement of profit or loss. For example, loss arising from the disposal of noncurrent assets is stated separately in the financial statement.

Loss is the opposite of profit. In another category, loss is the opposite of profit. In this case, loss is the excess of expenses over income of a business.

Generally, loss is a bad omen to management. The value of loss is known when the entity prepares its financial statements. The profit or loss statement, as well as, the other comprehensive income statement are used to measure management’s success and failure.

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If such a statement at the end of a particular period indicates a loss, it implies a failure on the part of management and its employees.

Loss is not stated in IFRS conceptual framework, therefore, it is not a concept in accounting, at least, for now. However, as already stated it reveals management failure.

To conclude, loss is a risk and represents an excess of expenses over income. Loss can come in various forms. Example, loss on disposal, loss on foreign exchange, and so on.

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