Definition of Gains
In financial accounting, gains often pertain to some of a company’s transactions which occur outside of the company’s main business activities. Transactions which are outside of a company’s main business activities are referred to as nonoperating activities.
Gain vs Operating Income
Let's assume that a company is a retailer whose main business activities are the purchasing and reselling of merchandise. When the retailer sells $5,000 of merchandise that it had purchased at a cost of $3,000, the retailer’s income statement will report sales of merchandise of $5,000 and cost of goods sold of $3,000. The difference of $2,000 is part of the retailer's gross profit, operating income, and net income. The word "gain" is not appropriate since the activities involved the normal business activities of the retailer.
However, if the same retailer sells its old delivery van, this transaction is outside of the retailer’s main business activities of purchasing and selling merchandise. Therefore, the sale of the van will not be included with the sales of merchandise. Instead, a gain (or loss) will be reported as one of the company’s nonoperating items often under the heading of other income.
Calculating a Gain
To illustrate the calculation of a gain, let’s assume that the retailer sells its old van for $5,000 cash. At the time of the sale the van is on the retailer’s books at $3,500 (which consists of its original cost of $20,000 and accumulated depreciation of $16,500). Since this transaction is not a main business activity of the retailer and since the $5,000 of cash received is greater than the net cost of $3,500 being removed from the accounts, the retailer will report a nonoperating item described as gain on sale of van of $1,500.
More Examples of Gains
Other examples of gains that could appear on a company’s income statement include:
- Gain on sale of investments
- Gain on sale of building
- Gain on legal settlement
- Gain on early extinguishment of debt