Realized Gain Definition - AccountingTools

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What is a Realized Gain?

A realized gain occurs when the sale price of an asset is higher than its carrying amount. This gain is only considered to be realized when the asset is removed from the entity's accounting records. Thus, a gain is only realized when the associated asset has been sold, donated, or scrapped. Realistically, a gain only arises when an asset is sold, since there is no income associated with a scrapped asset.

Unrealized gains are generally not taxed, while realized gains are taxed.

What is a Realized Loss?

A realized loss occurs when the sale price of an asset is lower than its carrying amount. This situation may arise when there is little demand for an asset, or when it must be sold very quickly, before having time to locate all possible buyers.

Taxation of Realized Gains

A realized gain is reported as taxable income. An entity may choose to delay selling an asset if it knows there will be a significant associated tax burden. Alternatively, it can sell other assets for which there will be realized losses, so that the losses offset the realized gain, resulting in a reduced tax or no tax at all.

Accounting for a Realized Gain

The accounting for a realized gain involves recording the profit when an asset is sold for more than its carrying (book) value. The gain is calculated by subtracting the asset’s book value from the sale proceeds. The gain is recorded by preparing a journal entry that includes the following elements:

• Debit: Cash or receivable (for the sale amount)

• Debit: Accumulated depreciation (if applicable)

• Credit: Asset account (for the original cost)

• Credit: Gain on Sale of Asset (for the gain amount)

Example of a Realized Gain

An investor pays $1,000 for several shares of stock. Two years later, he sells the shares for $1,200. His realized gain is the $200 difference between the purchase price and the sale price of the stock. Until the investor sells the shares, any gain is classified as an unrealized gain.

FAQs

Can realized gains occur without receiving cash?

Yes. A realized gain can occur without receiving cash if an asset is exchanged for another asset or settled through noncash consideration. The key event is derecognition of the asset from the accounting records. If the fair value of consideration exceeds carrying amount, a realized gain is recognized.

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