As a small-business owner who prepares financial statements in accordance with generally accepted accounting principles, or GAAP, you may need to know the difference between gains and losses that are realized and unrealized. Both types of gains and losses are recorded on your company's books and records -- but they're reported on separate statements.
Realized vs. Unrealized
Realized business gains and losses cover those transactions that are completed, such as the revenue from merchandise sales that customers have already paid for. In contrast, an unrealized gain or loss relates to transactions that are incomplete but for which the underlying value has changed since the last reporting period. A common example is when you invest company cash in stocks you still hold that can be sold fairly quickly and effortlessly. To illustrate, suppose you purchase stock for $20,000 that's worth $30,000 at the end of the reporting period. If you haven't sold the shares yet, this $10,000 gain is unrealized until you actually trade the shares.
Statement of Comprehensive Income
Unlike realized gains and losses that are reported on the income statement, unrealized transactions are usually reported in the statement of comprehensive income -- part of the equity section of the financial statements. Comprehensive income combines the realized gains and losses from the income statement with those that are unrealized, and provides a broader view of your company's financial position.
Michael Marz has worked in the financial sector since 2002, specializing in wealth and estate planning. After spending six years working for a large investment bank and an accounting firm, Marz is now self-employed as a consultant, focusing on complex estate and gift tax compliance and planning.