In the Black vs in the Red: What Does in the Black and in the Red Mean?
The expression “in the red” is used to describe a business that has negative earnings. This is in contrast to the phrase “in the black” which refers to businesses that are profitable and financially solvent.
The terms are derived from the color of ink used by accountants to enter the figures in the financial statements. Before the use of computers, accountants recorded income in black ink and expenses in red ink. For example, when the business posted positive earnings, the figure was marked in black. As opposed this, the debits, losses and debts were marked with red.
What this article covers:
- What Does the Phrase in the Red Mean?
- What Does Be in the Black Mean?
- What Is the Difference Between in the Black and in the Red?
NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area.
What Does the Phrase in the Red Mean?
The phrase “in the red” means that business is in debt and owes money. The red ink signifies financial losses for the business. It means that you have more expenses and bills than the money to pay them.
The color red invokes a sense of urgency that lets business owners know that they should work quickly to get their finances on track.
Depending on how your business is structured and how you receive money, you may be in the red only temporarily. For example, if you have $1200 in cash and have $1700 worth of expenses and bills to pay, you are $500 in the red. Even if you pay using a credit card, you still continue to be in the red because now you owe the credit card company.
New businesses often find themselves temporarily in the red for a period of time until they generate enough revenue to meet their expenses. However, if the business is consistently in the red it can be a concern for business owners as it can scare away creditors and potential business investors
What Does Be in the Black Mean?
The phrase “in the black” has a positive connotation in accounting. It refers to the accounting practice of recording incoming funds in black ink. When a business is in the black, it means that it does not owe any money and is solvent.
The phrase refers to the condition of businesses that have been profitable in their last accounting cycle and have posted a solid business performance. When you show your clients that your business is in black, you’re telling them that the business is making a profit or at least breaking even.
What Is the Difference Between in the Black and in the Red?
The phrases “in the red” and “in the black” are opposites. While “in the red” describes being in debt or losing money, the phrase “in the black” describes being solvent or accumulating money.
From an accounting perspective, your income statement shows whether you’re in the red or in the black.
Businesses often go through cycles of “being in black” and “in the red”. For example, if a business has had an exceptionally good year, you would be in the black. However, in some scenarios where you may have inherited some money or received money from a sale of an asset, you might be in the black for a short period of time, but not consistently year to year.
On the other hand, a large purchase may put the business “in the red” for a brief period of time. The goal of a business, however, is to minimize deficits and debts. Even when the business does run into these short-term debts, it should be for a brief period of time and there should be a specific plan to get the business “in the black” again.