Definition of Deficit Within Stockholders’ Equity
The term deficit is used within the stockholders’ equity section of a corporation’s balance sheet in place of retained earnings if the balance in the corporation’s retained earnings account is a debit balance. In other words, the corporation has a negative amount of retained earnings.
Example of Deficit Within Stockholders’ Equity
Assume a corporation was formed just over three years ago. In its first year, the corporation had a positive net income of $40,000. In its second year it had a positive net income of $75,000. As a result, the corporation’s balance sheet at the end of the second year will report Retained earnings $115,000. In its third year the corporation had a net loss of $195,000. Therefore, at the end of the third year the stockholders’ equity section of the corporation’s balance sheet will report Deficit ($80,000) in place of using the words retained earnings.
