Meaning 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 that are outside of a company’s main business activities are referred to as nonoperating activities.
For example, the main business or operating activities of a retailer are buying and reselling merchandise. Therefore, when the retailer sells $5,000 of merchandise that had 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 is referred to as gross profit and the word "gain" does not apply.
However, if the same retailer sells its old delivery van, this is outside of the retailer’s main business activities. Therefore, the sale of the van will not be included with the sales of merchandise. Instead, a gain will be reported as one of the company’s nonoperating items often under the heading of Other Income. To illustrate, let’s assume that the retailer sells its old van for $5,000 cash, and that the van is on the retailer’s books at $3,500 (consisting of its original cost of $20,000 and accumulated depreciation of $16,500 at the time of the sale). Since this transaction is not a main business activity and since the $5,000 of cash received is greater than the $3,500 of cost being removed from the accounts, the retailer will report a nonoperating item described as Gain on Sale of Van of $1,500.
Examples of Gains: Other examples of gains that will be reported 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