# Revenue vs Gains

Revenue and Gains are related fields related to the income a company receives. The main difference between them is the source of the income.

## Revenue

Revenue represents income earned by the firm through the primary goods and/or services provided. It is the income earned from the firm’s operating activities. For example, Mike’s Computers specializes in selling computers to small businesses. During the year, he sells 10,000 computers at $800, and nothing else. The total sales from the computers sold during the year,$8,000,000, would be Mike’s revenue.

## Gains

Gains, on the other hand, denote income not earned through the company’s operating activities, but on the sale of assets. Expanding upon the previous example, Mike’s Computers has decided to sell a warehouse it owns. The warehouse is listed under the long-term assets account Property, Plant, and Equipment (PP&E) at the historical cost of $100,000. Mike can sell the warehouse for$150,000 in 20X3. On the balance sheet, $100,000 will be subtracted from PP&E to write off the asset, while a gain of$50,000 will be reported on the income statement after taxes.

Gains directly impact our Balance Sheet and Income Statements, see the samples below to see how this property transaction impacts both.

### Balance Sheet

Year: 20X2

Assets

Property, Plant, and Equipment…………………………………………………$800,000 Year: 20X3 Assets Property, Plant, and Equipment…………………………………………………$700,000

### Income Statement

Year: 20X3

Revenues and Gains

### Realized Gains

Realized gains are listed on the income statement, while unrealized gains are listed under an equity account known as accumulated other comprehensive income, which records unrealized gains and losses. This account may be added to the end of the income statement (which results in comprehensive income), but is clearly marked as such and is not incorporated into the income statement.

A sample entry to the income statement would look like this:

Year: 20X3

Accumulated Other Comprehensive Income

Unrealized gain on available for sale securities………………………………………$50,000 # Expenses vs Losses Expenses and losses have the same underlying concept as revenue and gains, but for negative values. ## Expenses Expenses are the costs that are incurred over a time period to produce revenue. Expenses encompass many different forms, from the cost of goods sold to payroll for the period. Depending on whether the income statement is classified or not, the revenues and expenses may be separated into two groups or grouped together to create subcategories. During the year, expenses for Mike’s Computers may include$3,000,000 in cost of goods sold, $1,000,000 in payroll,$100,000 in advertising, etc.

A sample entry to the income statement would look like this:

Year: 20X3

Expenses

COGS………………………………………………………………………….$3,000,000 Payroll Expense…………………………………………………………………$1,000,000

Advertising Expense………………………………………………………………$100,000 ### Capitalization and Depreciation Expenses can either be capitalized or expensed. Capitalization effectively means the cost of an assets can spread out over the life of an asset. A machine, for example, may be capitalized rather than expensed because the asset has a long useful life. Example: Mike’s Computers has just purchased a piece of equipment for$200,000 that will more efficiently attach screens to monitors. Rather than expense all $200,000 from revenue in one year, Mike adds the equipment to the balance sheet. This is called Depreciation. Each year, the piece of equipment will depreciate; depreciation represents the cost of the machine incurred in a year, and is subtracted from revenue before interest and taxes. The first year (20X2), the machine may depreciate by$40,000. On the income statement, this would be recorded as a depreciation expense. On the balance sheet, the $40,000 would be added to a contra asset account known as accumulated depreciation. In year two (20X3), depreciation expense may again be$40,000. The balance under other accumulated depreciation would now be $80,000:$40,000 from the first year plus $40,000 from the second year. Over the years, depreciation will accumulate in the account until the asset is sold or written off. On the balance sheet, it looks like: Year: 20X2 Assets Property, Plant, and Equipment…………………………………$200,000

Accumulated Depreciation………………………………………………$40,000 Year: 20X3 Assets Property, Plant, and Equipment……………………………………$200,000

# Pop Quiz

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1 of 3) If you sell a piece of equipment or property for more than you paid for it, the profit is recorded on the…
2 of 3) If the property you own has gone up in value, but you have not yet sold it, where do you record the increase in value?
3 of 3) How are large expenses with long useful lives accounted for?