Realized and Unrealized Gains and Losses

See Also:
Accounting Income vs Economic Income
Capital Gains
Proforma Earnings
Operating Income
Net Income
Asset Market Value vs Asset Book Value

Realized and Unrealized Gains and Losses Explanation

In accounting, there is a difference between realized and unrealized gains and losses. Realized income or losses refer to profits or losses from completed transactions. Unrealized profit or losses refer to profits or losses that have occurred on paper, but the relevant transactions have not been completed. You can also call an unrealized gain or loss a paper profit or paper loss, because it is recorded on paper but has not actually been realized.
Record realized income or losses on the income statement. These represent gains and losses from transactions both completed and recognized. Unrealized income or losses are recorded in an account called accumulated other comprehensive income, which is found in the owner’s equity section of the balance sheet. These represent gains and losses from changes in the value of assets or liabilities that have not yet been settled and recognized. Now, look at the following realized and unrealized gains and losses examples.

Realized – Unrealized Examples

Example 1

If a company owns an asset, and that asset increases in value, then it may intuitively seem like the company earned a profit on that asset. For example, a company owns $10,000 worth of stock. Then the stock value rises to $15,000. On paper, the company made a paper profit of $5,000. However, the company cannot record the $5,000 as income.
This unrealized gain will not be realized until the company actually sells the stock and collects the cash. Until the stock is sold, the company only records the paper profit of $5,000 as an unrealized profit in the accumulated other comprehensive income account in the owners’ equity section of the balance sheet.
Once the company actually sells the stock, the unrealized gain is realized. Only after the stock is sold, the transaction is completed, and the cash is collected, can the company report the income as realized income on the profit and loss statement.

Example 2

Similarly, if a company owns an asset, and that asset decreases in value, then it may intuitively seem like the company incurred a loss on that asset. For example, a company owns $10,000 worth of stock. Then the stock value plunges to $5,000. On paper, the company suffered a paper loss of $5,000. However, the company cannot record the $5,000 as a loss on the income statement.
This paper loss will not be realized until the company actually sells the stock and takes the actual loss. Until they sell the stock, only record the paper loss of $5,000 as an unrealized loss in the accumulated other comprehensive income account in the owners’ equity section of the balance sheet.
Once the company actually sells the stock, the unrealized loss becomes realized. Only after the stock is sold, the transaction is completed. Then the cash changes hands. Finally, the company reports the loss as a realized loss on the income statement.
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