Definition: The term gain, for financial and accounting purposes, refers to the appreciation in the market price of any property or asset. The concept can also be easily explained as the increase in value of a given asset or simply selling something for more than you paid for it.
What Does Gains Mean?
What is the definition of gains? It is important to state the difference between revenues, profits, and gains when talking about this concept. Revenue refers to the amount of money received by the regular business activities of the company, i.e. selling goods or services. Profits are the excess revenues after costs and expenses have been paid for a period. Gains, on the other hand, come from an increase in the value of a given asset.
To calculate a gain or loss in the value of an asset, we must identify what is the current market value of the asset and then subtract the acquisition cost of that asset. Gains can be either realized or unrealized. Realized gains take place when the transaction is completed and the asset is sold, the buyer takes ownership and the seller takes the payment, including the gain. Unrealized gains occur when the market value of the asset rise, but the asset hasn’t been sold yet. Thus, it remains on the hands of the current owner. There is a gain but is hasn’t been realized yet.
An example of this concept can be illustrated through the following situation.
Example
Rice and Wheat INC is a company that operates in the agricultural business. As part of their regular accounting process, they recently did a market valuation for some of their most expensive equipment and buildings. One of the properties they own, an office building in Atlanta, increased its value last year by more than 30%. The current market value of the property is $5,500,000, while the acquisition price was 3,300,000. In this situation, what would be the gain and which kind of gain would that be?
According to our definition, a gain is calculated by subtracting the acquisition cost from the current market value. Thus, Rice and Wheat would have a gain of $1,200,000 ($5,500,000 – $3,300,000). Since the company hasn’t sold the building yet, this would be considered an unrealized gain.
Summary Definition
Define Gain: Gains means a financial benefit or a profit from a certain transaction.
