Gain

A gain in financial accounting is an increase in net profit that results from something other than day-to-day earnings from recurring operations and is unrelated to investments or withdrawals. Typical gains are not regular transactions, which could be a gain on the sale of land, a change in the market price of a stock or a gift.

Characteristics of Gain

• Investors discuss gains whenever the price of an asset surpasses the purchase price, but unrealized gains can come and go several more times before the asset is sold

• A gain occurs when the current value of something owned exceeds the actual purchase price

• When an investor sells an asset that has appreciated, they are said to have realized the gain—or, to put it another way, made a profit

Types of Gains

Gains in Financial accounting are based on whether the investor or buyer still holds a particular asset or sells it. It is divided into the following categories –

Unrealized Gains

An unrealized gain happens when the value of an asset rises after the buyer invests it but does not sell it. That is, the asset’s existing price is greater than when the investor first purchased it. 

For example, if Tanay’s investment of 10,000 rupees turns into 15,000 but he doesn’t sell the investment, he will be at risk of losing the gain he earned and hence potential to make profits decreases. 

Realized Gains

A realized gain is a profit earned by selling assets at a higher price than the initial investment. When an asset is sold for a higher price than it was originally purchased for, a realized gain is realized, increasing current assets. Because the seller benefits from the transaction, this gain is taxable.

For example – If Sunita invests 10,000 rupees and earns a 30% profit on it. She earns 3000 rupees of unrealized gains. If she decides to book profits she gets to earn 3000 rupees as profits. This is called realized gains. Realized gains eliminate the opportunity of potentially getting more profits than it has attained. However, it also eliminates the risk of potentially reducing the profits and the risk of losing money.

Taxes Applied on Gains

Realized gains in India are taxed as capital gains. A capital gain may apply to gains in asset classes, such as tokens, artworks, and wine collections, in addition to traditional assets.

The capital gains tax rate depends on the type of asset, the personal income rate, and the length of time the asset is held. Short-term profits are generally treated as income, whereas long-term gains (held for more than a year) are taxed more kindly.Net realized gains, rather than gross gains, are considered for tax purposes. In the case of a stock transaction in a registered account, the tax gain will be the difference between the sale and purchase prices, and fewer brokerage commissions.

Examples of Taxable gains

Here is an example of calculating taxable gain in an investment. 

Consider Rajiv buying a property of INR 30 lakhs. After 3 years, he sold the property for INR 40 lakhs making a profit of INR 10 lakhs on his purchase price. He also paid commissions worth INR 2 lakhs during the purchase and sale of the property. Hence Taxable gain would be –

Purchase price – 30,00,000 Rupees

Sale price         – 40,00,000 Rupees

Commission     –   2,00,000 Rupees

Therefore taxable gain = (Sale – Purchase) – Commission

= (40,00,000 – 30,00,000) – 2,00,000 

= 8,00,000 Rupees

Hence the taxable income in this transaction will be INR 8 lakhs. Rajiv will have to pay taxes on INR 8 lakhs, which is considered to be the net profit. These profits are also called capital gains.

Compounding gains

Compound gains, also defined as compound interest, are earned gains that are added to current gains. Assume an INR 50,000 investment in security yields a 10% annual return, resulting in an INR 5,000 profit. In the following year, it generates a 20% return, implying that the investment will produce INR 10,000 (INR 50,000 x 10% gain), and so on. In general, compound gains are one method of accumulating wealth over time. However, how much individuals can attain will be determined by the time over which you want your profits to accumulate. If you start compounding gains as an investor when you are young, there is still the possibility of accumulating significant wealth.

Conclusion

Gains are an important concept in financial accounting and are useful in understanding a business’s gross and net profits and losses. It is also useful in calculating taxes. Compounding gains are among the finest tools for growing money, especially for younger people if used correctly.