What is a Loss?

Definition: In financial accounting, a loss is a decrease in net income that is outside the normal operations of the business.

Losses can result from a number of activities such as; sale of an asset for less than its carrying amount, the write-down of assets, or a loss from lawsuits.

The following are types of losses that are most commonly found in your average business.

Losses on Sale of Assets

This is known as a nonoperating item resulting from the sale of an asset (excluding inventory) for less than the amount shown in the company's accounting records. Meaning that the asset was sold for less than it was worth in the company's books.

Since the loss is outside of the main activities of a business, it is reported on the income statement as a nonoperating or other loss. This term is also used to show the writedown of asset amounts to a value that is lower than cost.

Loss from Lawsuit

A reduction in net income that comes from a judgement against the company. Generally, accounting principles stipulate that such losses must be recorded when the amount of the loss is determined to be probable and the amount can be estimated.

This indicates that the loss is likely to be shown in the financial statements earlier than the actual payment is made. If the 'loss' is only possible (and not probable) it is disclosed in the notes to the financial statements rather than actually recorded in the statements themselves.

If the 'loss' is unlikely to occur, it does not need to appear in the notes or in financial statements.