What Does a Negative Income Mean in Accounting?

People often use the word "income" interchangeably with "salary" or "wages." However, a business uses the word "income" to represent the company's profit or loss over a period of time. Negative income occurs when the company has more expenses than revenues. As such, negative income refers to a loss suffered by the business.

Income Statement

A negative income figure appears on a company's income statement, also known as a profit and loss statement. The income statement shows the company's revenues and expenses. When the expenses exceed the revenues, the company has a negative income. The company may receive revenues from sales of goods and services, dividends and interest. A business usually has to pay out various expenses, such as cost of inventory, administrative expenses, taxes and interest on loans.

Accrual Accounting Method

In the accounting sense, a negative income does not always mean the company has lost cash during a period. This is because accountants often use the accrual method of accounting, which takes into account revenues and expenses at the time they are incurred, not necessarily when cash is paid or received. For example, if a company buys a piece of machinery on credit, the accountants record the expense at the time of purchase, although the company does not pay out the cash until later.

Cash Accounting Method

If the company uses the cash method of accounting, this means it records revenues and expenses only when cash changes hands. In the case of a credit purchase example, the accountants would record the expense when the company pays out the cash. A negative income in this sense indicates a loss of cash. If a company uses the accrual method of accounting in its income statement, it may list its cash position in the cash flow statement.

Tax Implications

Having a negative income may earn a company tax benefits. The company may have negative taxable income and receive tax refunds from the tax authority as a result. For example, if a company has positive income in one year and negative income in the next year, the company can use its negative income to offset its positive income. This reduces the amount of its taxable income and, therefore, reduces its tax liability.

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About the Author

Edriaan Koening began writing professionally in 2005, while studying toward her Bachelor of Arts in media and communications at the University of Melbourne. She has since written for several magazines and websites. Koening also holds a Master of Commerce in funds management and accounting from the University of New South Wales.