An actual loss is the total amount of net loss after considering all factors related to a transaction, and must involve actual cash loss. It is used to accurately determine the loss sustained when selling an asset, such as real estate or a vehicle.
An actual loss is the total amount of net loss that an individual or business experiences after taking into account all factors related to a transaction. Rather than being a projection or estimate of the loss involved, an actual total loss is calculated using specific criteria and must involve actual cash loss, not just losses that are on paper but not yet realized. This means that although an investor may lose money on stocks, if the unit price of those stocks falls, no real loss will occur until those stocks are actually sold and the investor fails to recoup his original investment in those stocks.
One of the easiest ways to understand what is meant by a total loss is to consider a family vehicle stolen and ultimately stripped by thieves and sold for scrap metal. In this scenario, there is no opportunity to repair the vehicle and make it viable again, so the loss to the owner is complete. There is some difference of opinion as to whether the actual loss value is the current market value of the vehicle or the original purchase price. In both cases, the fact that the asset is destroyed and nothing can be recovered from the situation means that the owner suffers a real loss.
When dealing with an actual sustained loss, identifying the value of that loss usually involves taking into account factors such as changes in the economy that could have an impact on value, during a recession or a period of inflation. Any small income that could be generated from the asset would also be used to offset the full amount of the actual loss. Using the stolen car example, if the vehicle was recovered but it was determined that it would take longer to fix the car than it was worth, what is left of the vehicle can be sold for scrap, and the proceeds of that sale would be deducted from fair market value of the car before it was stolen.
The underlying objective of the actual loss calculation is to accurately determine what type of loss, if any, is sustained when selling an asset. Businesses typically calculate this type of loss when selling real estate or other types of assets as part of a company closure or as a means of downsizing the business in an attempt to remain operational. Likewise, individuals may seek to determine the actual loss incurred when selling homes if the current market value falls below the current balances owed on the mortgages associated with those properties.
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