Debitoor Dictionary

Accounting terms explained in a simple way

Over 150 Articles for Founders and Entrepreneurs

  1. Income statement
  2. Profit & Loss Statement
  3. Capital Gains Tax

Gains - What are gains?

A gain is any economic benefit that is outside the normal operations of a business, typically from the increased value of an asset

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A gain may be realised for many different reasons. An excess of money or fair value of property received on sale or exchange of an asset is considered to be a gain. An asset that increases in value is also considered a gain, even if not sold by the business.

In addition, a gain may also be recognised when any type of financial instrument is sold for more than its purchase price.

Different types of gains

While a gain seems like a fairly straightforward type of economic benefit, there are in fact different kinds of gains that businesses experience. These are ‘realised gains’ and ‘unrealised gains’. The amount of the gain is determined by subtracting the price of purchase from the current market value of the asset.

Realised gains

A realised gain occurs when an asset that has increased in value and then was sold at that value and the additional amount added to the company records as a gain.

For example: Anne sells antiques from her boutique. A Victorian desk that she purchased for £400 in 1990 increased in value and she then sold it for £2,400 in 2016. This asset has experienced a gain of £2,000 over the course of Anne owning it in her business. It is considered a realised gain since she has sold it and received an excess on the sale vs. what she initially paid for the purchase.

Unrealised gains

Unrealised gains are gains that are recognised, such as an increase in value of land, but not realised because the land has not been sold yet and is still an asset on the books of the company.

For example: Thom’s purchased his 15 acre farm for £800,000 in 1990. Today, his property was evaluated with a value of £3.5 million. This impressive increase is considered a gain. However, because Thom still owns the property and runs his business there, this is considered an unrealised gain.

Gains in accounting

The value of assets should be recorded whether they experience depreciation or result in a gain. When recording a gain or a loss after the sale of an asset, the income received should be entered, but then the remainder (whether a gain or loss) should also be included accordingly. In the case of a gain, it would be recorded as such under the ‘Disposal of an Asset’.

Sometimes gains are taxable if an individual or business sells or passes on a private asset that has become more valuable since the time of acquisition. This is known as capital gains tax and should be reported if applicable.