Accounting Theory and Accountability: Net Loss Analysis

This report delves into the concept of net loss within the framework of accounting theory and accountability. It defines net loss as the situation where a company's expenses surpass its revenues during a specific period, highlighting that while it may not immediately lead to bankruptcy, it can significantly impact a company's financial health and shareholder returns. The report explores the formula for calculating net loss (Revenue - Expenses = net loss) and its implications, including potential causes such as lower revenues, ineffective marketing, and intense competition. It then examines the adverse effects of net loss on shareholder returns, including reduced dividend payments and decreased investor confidence. Furthermore, the report references a real-world example involving Talent2, illustrating how net loss can lead to revenue decline and financial instability, ultimately making shareholder returns unviable. Overall, the report underscores the critical importance of profitability for a company's long-term sustainability and its ability to provide value to shareholders.

Running head: ACCOUNTING THEORY AND ACCOUNTABILITY
Accounting theory and accountability
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Meaning of net loss
Net loss is referred as the net operating loss that takes place while the expenses of the
company exceed its total revenue or net income generated during the particular period of
time. If the business have net loss, it is not necessary that they will go bankrupt as they may
continue their operation using the retained earnings or can borrow from outside. However,
using this strategy the business can survive for short run as for long the entity will require
profits for surviving (Bartov & Mohanram, 2014). Net loss appears on the bottom line of the
entity and it is calculated through using the following formula –
Revenue – Expenses = net loss or net profit.
Net loss is the example for matching principle as expenses and revenues are matched
under the particular period of time. Expenses incurred for generating the income under the
particular period is included in the same period irrespective of the time of expense. Net losses
can be occurred due to lower amount of revenues, unsuccessful marketing activities and
strong competition. COGS also have an impact on the net loss. The purchase cost of the
products and the production cost are subtracted from the revenues. Remaining balance is used
for cover off the expenses and generating profits. However, if the COGS exceed the funds
allocated for meeting expenses it will result into net loss (Robinson et al., 2015). Further, the
expenses also generate net loss. Even if the company earned the target revenues and COGS
remains under limits, overspending and unexpected expenses may exceeds the gross profit
leading to net loss.
Impact of net loss on shareholder’s return
Negative net income or net loss has large adverse impact on the on the entity as
compared to the financial loss. Net loss may shake the confidence of the investor and can

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have large impact on the ability of the company for distributing the profits as return on the
equity to the shareholders. Further, it case of Talent2 it is expected that the revenue from
recruitment will fall by 16% and the total revenue will fall to $ 114.4 million whereas it was
expected for $ 228.7 million. Further, owing to the impairment charges associated to the
Hong Kong and UK’s operation the projected loss before charging tax amounting to $ 5.5
million. It will further make the shareholder’s return unviable (Godfrey et al., 2010).
Further, the companies generally pay the dividends from the profits it makes. Hence if
it does not able to earn any profit it will have adverse impact on the dividends payment to the
shareholders. Further, if the entity borrows the funds for paying dividend it will lead the
company into further debt. On the other hand, if it uses the the retained earnings for paying
out dividend to the shareholders it will hamper the regular operation of the entity (Popa &
Ciobanu, 2014). Hence, the net loss will have adverse impact on the shareholders return and
will make it unviable.

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Reference
Bartov, E., & Mohanram, P. S. (2014). Does income statement placement matter to investors?
The case of gains/losses from early debt extinguishment. The Accounting
Review, 89(6), 2021-2055.
Godfrey, J., Tarca, A., Godfrey, J., & Picker, R. (2010). Financial accounting theory &
practice. Milton, Qld.: John Wiley & Sons.
Popa, A. E., & Ciobanu, R. (2014). The financial factors that influence the profitability of
SMEs. International Journal of Academic Research in Economics and Management
Sciences, 3(4), 177.
Robinson, T. R., Henry, E., Pirie, W. L., Broihahn, M. A., & Cope, A. T.
(2015). International Financial Statement Analysis, (CFA Institute Investment Series).
John Wiley & Sons.