Apply carry forward losses against an entity’s profit

Some entity types may have losses from a prior period that can be offset against profit in the current year.

This page explains the process for accountants and bookkeepers who are Xero partners to apply prior year losses against the entity’s profits, and report on those losses using the default report templates in Partner Edition for the specific type of entity. If you don’t have access to report templates, you can customise the Profit and Loss and Balance Sheet reports in your client’s organisation instead.

How it works

To offset carry forward losses from a prior year against the current year earnings for a trust or company, create an expense account in Xero and post a journal from this account to retained earnings. This applies the prior year losses and reduces the profit available to distribute or pay as a dividend. You can then distribute the net current year profit to the stakeholders.

Worked example

In this example, we’ll be using a trust to walk you through the process. However, you can easily adapt it for a company.

A trust has made a current year profit of 125,000 but has prior year losses of 100,000. You want to offset the prior year losses and distribute a net current year profit of 25,000 to the two beneficiaries, Mary and Peter.

  1. If it’s not already set up, add an expense account to your chart of accounts for carry forward losses.

    Image showing adding an account for carry forward losses

  2. Map the report code for the account for carry forward losses to Losses applied from prior periods (EXP.CFL).

    Image showing mapping the carry forward losses to the EXP.CFL report code

  3. If it's not already, map the Retained Earnings to Retained earnings / Accumulated funds (EQU.RET).

  4. On your Trading Income Statement report template, make sure:

    • The Distribution of Trust Income group is visible, and that it’s named the way you want it
    • The template is saved as ready for use
  5. In your client organisation, create and post a manual journal to offset the prior year losses against the current year earnings as follows:

    • Narration - describe the reason for the journal
    • Date - usually the last day of the financial year
    • First line - the full amount of the carry forward losses, in this case 100,000, debited to the expense account for carry forward losses
    • Second line - the corresponding amount of 100,000 credited to the retained earnings account

    Image showing the creation of a manual journal for the carry forward losses

  6. When you run the Trading Income Statement and Balance Sheet reports for the period, you will see that the undistributed income is now 25,000.

    Image of a portion of the Trading Income Statement showing the income with losses applied in 'Distribution of Trust Income' group

Now that the prior year losses have been applied, you can distribute the net current year earnings of 25,000 to Mary and Peter.