Net loss is an accounting term that refers to a situation in which an entity’s revenues are less than its expenses. Net loss is expressed in the form of a negative profit or loss that is made by an entity in a given reporting period.
What is a net loss? Definition of the term
A net loss is the difference between an entity’s revenues and expenses in a given reporting period. A net loss is recognized in an entity’s financial statements as a negative profit or loss. Net loss is an important indicator of an entity’s performance and can be used by investors or banks to assess an entity’s financial position.
How to calculate the net loss?
The net loss is calculated by subtracting expenses from the entity’s revenues during the reporting period. Costs can include, among other things, the cost of materials, the cost of third-party services, salary costs, depreciation costs, etc. Revenues, on the other hand, are the amount the entity received from the sale of its products or services.
Example: An entity’s revenue in a given period is PLN 100,000, and its costs are PLN 110,000. In this case, the entity’s net loss is PLN 10,000 (PLN 110,000 – PLN 100,000 = PLN 10,000).
Net loss vs gross loss
Gross loss is the difference between revenue and direct costs of the entity, i.e. costs that are directly related to the production or sale of the entity’s products or services. Net loss, on the other hand, is the difference between revenues and all costs of the entity. Net loss includes other costs, such as indirect costs (e.g., administrative costs), financial costs (e.g., interest on borrowings) and other costs that are not included in direct costs.
Example: An entity’s revenue in a given period is PLN 100,000, and its direct costs are PLN 80,000. In this case, the entity’s gross loss is PLN 20,000 (PLN 100,000 – PLN 80,000 = PLN 20,000). If the entity incurred other costs, such as indirect costs or financial costs, the net loss will be higher than the gross loss.
Thus, net loss and gross loss differ in that gross loss takes into account only direct costs, while net loss takes into account all the entity’s costs. Both losses are important indicators of an entity’s performance and can be used by investors or banks to assess an entity’s financial position.
