No. of Recommendations: 1
Are you referring to TOTAL equity or RETAINED EARNINGS?

A negative retained earnings account arises when prior years' net income and loss nets out to a loss. Say company A has income of 100K in the first year has a net loss of 200K in year 2 and a net loss of 100K in year three. The company's retained earnings would equal negative 200K.

It's how the company deals with these losses that matters. If a company continually loses money, it needs to find capital to operate. It has two basic sources - equity or debt.

If equity is the chosen path, then the company will have an increase in its common stock and additional paid in capital accounts. This means that the owners (stockholders) of the business have opted to finance the continuing operations. The balance sheet would (generally)show a positive TOTAL equity. Meaning that the owner's would have a larger claim to the business than the creditors.

If debt is the option of choice, the other components of equity would not change (CS and APIC) and eventually TOTAL equity would go negative meaning that the creditors would have a larger interest in the company's assets than the owners. Not good.

As for what it means in the grand scheme of things, its hard to say. If the business is a typical brick and mortar business, negative RE or equity can't be good for the long term. The company just isn't making money. However, this should be expected of a drug company or other experimental type company that incurrs large expenses up front without any revenue.

Help any?

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