What Is Red Ink?

Red ink is business jargon describing a financial loss. When accountants make physical entries into a general ledger, red ink is used to show a negative number and black ink is used to show that a number is positive or profitable.

Key Takeaways

  • Red ink is financial jargon describing the coloring of accounting entries used to denote losses or negative outcomes.
  • When accountants make physical entries into a general ledger, red ink is used to show a negative number and black ink is used to show that a number is positive or profitable.
  • That custom paved the way for the term "in the red," which can be applied to any company or individual with a negative balance.

Understanding Red Ink

In many cultures, colors can function as a sort of language, symbolizing particular feelings and emotions. Some of them evoke calm and tranquillity, while others are more loud and powerful.

Red falls under the latter category and is said to signify everything from energy, passion, and sexuality to aggression, danger, violence, and war. Some of these associations can be described as positive and others negative, yet in financial circles any mention or use of this particular color almost always means something bad.

Red ink is synonymous with the business expressions: "bleeding red ink" or "in the red." When red is used with numbers it generally indicates that a company, government, or other entity is in financial difficulty, spending more money than it is bringing in. The color signifies a negative balance, so an individual entering their overdraft, or who has more liabilities than assets and is unable to pay off debts, can also be characterized as being in the red.

Red is often used in business to indicate that something unwanted is happening, too. For example, regulations governing companies are regularly referred to negatively as red tape. Investors may also refer to a falling share price or stock market as being in the red.

Black Friday, the day after the Thanksgiving holiday when retailers deeply discount merchandise to attract shoppers, was given this name because many retailers who've been operating "in the red" see their finances turn to profit (black) on account of heavy sales.

History of Red Ink

The negative connotations of red in finance can mainly be attributed to the old custom of accountants opting to use the color to denote losses. When company books were maintained manually, or by hand, red and black ink were convenient methods to call attention to those variables losing money, and those adding value. Red, it just so happens, signified the former.

Important

The pairing of red with losses can be traced back to the tradition of accountants using red-colored ink to enter a negative figure on a company's financial statements.

That habit has lived on. Today, most financial and operational ledgers are maintained electronically, although it is not uncommon for software to utilize red and black coloring to highlight losses and gains.

Special Considerations

A company with red ink featuring heavily in its accounts may not necessarily be doomed. A lack of profitability might be a temporary issue, linked to necessary expenditure on research, new technology, or to pay off debt.

These expenses make its financial statements look ugly. However, over the longer term, they should strengthen the company and its ability to make money.

Investors will often be willing to overlook red ink if they have assurances that outgoings are being used appropriately to chase better growth prospects. In fact, many of the most popular stocks have high debt-to-equity (D/E) ratios, highlighting a preference for companies that aren’t afraid to take risks to secure greater future earnings.

The line may be drawn when a company is consistently in the red. Persistent loss-making could lead it to lose shareholders, fail to attract new ones, struggle to secure any financing, and end up on the path to bankruptcy.