Can a Company Have an Accumulated Deficit & Cash?
A company with an accumulated deficit has spent more money over its lifetime than it has taken in. But just because a company shows an accumulated deficit doesn't mean it is out of cash or even close to running out.
It's entirely possible to have both an accumulated deficit and a positive cash balance. A look at the elements of owner's equity helps explain why.
It's entirely possible to have both an accumulated deficit and a positive cash balance. Just as retained earnings are not the same thing as cash, an accumulated deficit does not mean the company does not have any cash.
The equity section of a company's balance sheet provides information about the owners' stake in the company. There are two components to owners' equity: contributed capital and retained earnings.
Contributed capital, or paid-in capital, is money the owners have directly invested in the company.
Retained earnings are company profits that the firm has held onto, as opposed to distributing to the owners.
Say a company makes $1,000 in profit. The owners are entitled to take that money. It's theirs, after all. But if they leave it with the company, then the earnings are "retained," and owners' equity increases.
The retained earnings figure on a company's balance sheet does not represent cash on hand. It's simply the running total of the profits the company has held onto since the founding of the firm.
Often, the entire reason for retaining profits is to reinvest them in the company.
That $1,000 that was added to retained earnings might just be sitting in the bank as cash. But the company might have used it to buy something, such as a new computer. Either way, the $1,000 remains in retained earnings.
A company can have negative retained earnings. This happens when the company's total losses since its founding are larger than its profits. Negative retained earnings are referred to as an "accumulated deficit."
Startup companies frequently show an accumulated deficit on their balance sheet because they're spending money faster than they're taking it in as they develop a customer base and do all the other things it takes to build a company.
And just as retained earnings are not the same thing as cash, an accumulated deficit does not mean the company does not have any cash.
Imagine a brand new company has $10,000 in cash reserves. Since it's just starting out, the company has no retained earnings. Over the course of its first year in business, the company takes in $48,000 in revenue and has expenses of $50,000, so it has to draw down its cash reserve by $2,000 to pay its bills.
The company has lost money over the year, and it now has an accumulated deficit of $2,000. But it still has $8,000 in cash reserves.
It has both an accumulated deficit and cash.