Question

You are in a meeting with Andrea Schwager, the new CEO of your company, discussing property, plant, and equipment, when she asks the following: “The accountants are telling me that, if we sell a piece of equipment for an amount in excess of its carrying amount on our statement of financial position, then we record a ‘gain,' which increases net income. If it increases net income, then why don't we call it a ‘revenue'? Wouldn't this be more understandable for financial statement users?”

Answer Andrea Schwager's questions.

Answer 1

On the question from andrea schwager that why we not call the gain on the sale of the equipment asset, a revenue.

The Accountant have not answer both in technical and non-technical way:

Technical : In accounts there are two kinds of accounts Revenue and Capital nature. The revenue nature accounts are used to calculate the profit or loss of the concern. These includes the sales and expenses of the period of the concern. So, equipment, being the capital nature assets, is used to produce sales. Because of its depreciating nature, the equipment is used to sold out and the difference between the un-used and sold out value of the equipment is taken as Gain or Loss of disposal of the equipment. As it is not a daily sales and happen only in years gap, so we call it as Gain or Loss of sale of equipment. Being gain it has to be merged with the other income under Net Income.

Non-technical: We sell the equipment or other depreciated assets once in many years. So, we can not include them under the Renenue Sales account. There have to be a difference between the un-used value and the sold out value of the equipment, so the difference is called either Gain and Loss, which is merged with the other income under Net Income, so that taxation takes place taking in combined.

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