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When your company sells off an asset or investment, any gain on the sale should be reported on your income statement, the financial statement that tracks the flow of money into and out of your business. However, because of the circumstances under which you received this money, the gain should not be counted as revenue.
Revenue vs. Gain
Money that comes in through the regular course of business appears on your income statement as sales revenue. If you own a shoe store, for example, revenue would be what you receive from customers in exchange for shoes, other merchandise or any services you might offer, such as shoe repair. But say your company had a warehouse it didn't need anymore. If you sold it, the money you got wouldn't be revenue, because you aren't in business to sell buildings. You're in business to sell shoes, and the building sale was a one-time cash flow. The sale would appear on the income statement, but as a gain or loss on sale, not revenue.
Where It Goes
The typical income statement starts with sales revenue, then subtracts operating expenses, which are just the regular, day-to-day costs of doing business. The result is operating profit -- the profit the company made from doing whatever it is in business to do. Gains and losses from asset sales then go below operating profit on the income statement. They might appear on their own line, or they could get lumped in with other things in a catch-all category such as "other income" or "nonoperating income." Gains on sales do not affect operating profit, but they do affect net income, or the company's overall "bottom line" profit.
When you sell an asset, the gain you report on the income statement is not just the sale price of the asset. Rather, it's the sale price minus the "book value" of the asset. The book value is the price you paid for the asset when you acquired it, minus the accumulated depreciation on the item. Say your shoe store paid $80,000 for a warehouse 10 years ago and you have depreciated it at $2,000 a year. The book value is $60,000 -- the $80,000 cost minus $20,000 worth of depreciation. If you sell the warehouse for $90,000, your gain on the sale is $30,000. (If you sold it for $50,000, you'd have a $10,000 loss on the sale.)
A healthy, established company should be generating profit from its operations -- its regular business. (Startups may take some time to get there.) But a company whose operations are losing money, with expenses exceeding revenue, could still report positive net income by selling off assets and reporting a gain on sales. That's one reason why investors, lenders and others pay close attention not just to a company's bottom line but also to the lines above it on the income statement.
- Financial Accounting for MBAs, Fourth Edition; Peter Easton, et al
- AccountingCoach: What Is the Difference Between Revenue, Income and Gain?
- AccountingCoach: Gain on Sale of Assets
Cam Merritt is a writer and editor specializing in business, personal finance and home design. He has contributed to USA Today, The Des Moines Register and Better Homes and Gardens"publications. Merritt has a journalism degree from Drake University and is pursuing an MBA from the University of Iowa.