Revenue vs Gains
Revenue and Gains are related fields related to the income a company receives. The main difference between them is the source of the income.
Revenue
Revenue represents income earned by the firm through the primary goods and/or services provided. It is the income earned from the firm’s operating activities. For example, Mike’s Computers specializes in selling computers to small businesses. During the year, he sells 10,000 computers at $800, and nothing else. The total sales from the computers sold during the year, $8,000,000, would be Mike’s revenue.
Gains
Gains, on the other hand, denote income not earned through the company’s operating activities, but on the sale of assets. Expanding upon the previous example, Mike’s Computers has decided to sell a warehouse it owns. The warehouse is listed under the long-term assets account Property, Plant, and Equipment (PP&E) at the historical cost of $100,000. Mike can sell the warehouse for $150,000 in 20X3. On the balance sheet, $100,000 will be subtracted from PP&E to write off the asset, while a gain of $50,000 will be reported on the income statement after taxes.
Gains directly impact our Balance Sheet and Income Statements, see the samples below to see how this property transaction impacts both.
Balance Sheet
Year: 20X2
Assets
Property, Plant, and Equipment…………………………………………………$800,000
Year: 20X3
Assets
Property, Plant, and Equipment…………………………………………………$700,000
Income Statement
Year: 20X3
Revenues and Gains
Gain on sale of asset………………………………………………………………$50,000
One thing to note is that both revenues and gains are reported on the income statement net of taxes. Furthermore, gains are reported when an asset can be sold for more than what it is listed for on the balance sheet, which is typically historical cost (although some assets, such as derivatives, are always listed at fair value). Income from the sale of property, equipment, securities, etc. all are considered items that would fall under the category of gains on the income statement.
Realized and Unrealized Gains
Gains can be broken into two categories: realized and unrealized. The example above regarding the warehouse is considered to be a realized gain because the asset was sold and income was received.
Unrealized Gains
Unrealized gains are gains in value on an asset that has not been sold, and thus do not result in income. If Mike’s Computers purchases 10,000 shares of Sally’s Software, Inc. for $15 a share at the beginning of the year, and those shares are $20 at the end of the year, the investment would have increased from $150,000 to $200,000, a $50,000 gain. However, since Mike did not sell the security, he cannot report this gain as income on the income statement. Thus, it is an unrealized gain.
Realized Gains
Realized gains are listed on the income statement, while unrealized gains are listed under an equity account known as accumulated other comprehensive income, which records unrealized gains and losses. This account may be added to the end of the income statement (which results in comprehensive income), but is clearly marked as such and is not incorporated into the income statement.
A sample entry to the income statement would look like this:
Year: 20X3
Accumulated Other Comprehensive Income
Unrealized gain on available for sale securities………………………………………$50,000
Expenses vs Losses
Expenses and losses have the same underlying concept as revenue and gains, but for negative values.
Expenses
Expenses are the costs that are incurred over a time period to produce revenue. Expenses encompass many different forms, from the cost of goods sold to payroll for the period. Depending on whether the income statement is classified or not, the revenues and expenses may be separated into two groups or grouped together to create subcategories. During the year, expenses for Mike’s Computers may include $3,000,000 in cost of goods sold, $1,000,000 in payroll, $100,000 in advertising, etc.
A sample entry to the income statement would look like this:
Year: 20X3
Expenses
COGS………………………………………………………………………….$3,000,000
Payroll Expense…………………………………………………………………$1,000,000
Advertising Expense………………………………………………………………$100,000
Capitalization and Depreciation
Expenses can either be capitalized or expensed. Capitalization effectively means the cost of an assets can spread out over the life of an asset. A machine, for example, may be capitalized rather than expensed because the asset has a long useful life.
Example: Mike’s Computers has just purchased a piece of equipment for $200,000 that will more efficiently attach screens to monitors. Rather than expense all $200,000 from revenue in one year, Mike adds the equipment to the balance sheet. This is called Depreciation.
Each year, the piece of equipment will depreciate; depreciation represents the cost of the machine incurred in a year, and is subtracted from revenue before interest and taxes. The first year (20X2), the machine may depreciate by $40,000. On the income statement, this would be recorded as a depreciation expense. On the balance sheet, the $40,000 would be added to a contra asset account known as accumulated depreciation. In year two (20X3), depreciation expense may again be $40,000. The balance under other accumulated depreciation would now be $80,000: $40,000 from the first year plus $40,000 from the second year. Over the years, depreciation will accumulate in the account until the asset is sold or written off. On the balance sheet, it looks like:
Year: 20X2
Assets
Property, Plant, and Equipment…………………………………$200,000
Accumulated Depreciation………………………………………………$40,000
Year: 20X3
Assets
Property, Plant, and Equipment……………………………………$200,000
Accumulated Depreciation………………………………………………$80,000
Losses
Losses are similar to gains in that both are recognized on the income statement only when an asset is sold and a loss is taken. Like gains, there can also be unrealized losses.
For example, lets say Mike purchased 100 shares of Sally’s Software, Inc. for $15. If the value of the stock at the end of the period is $10, Mike will have $500 in unrealized losses, which is a part of the equity account accumulated other comprehensive income. Losses can be realized on property, plant, equipment, securities, etc. Unlike gains, there is no outflow of money for taking a loss; it simply means that the sale of an asset wasn’t greater than the original cost.
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