Define what is meant by the terms realized and recognized gains? Can a gain be realized...

Define what is meant by the terms realized and recognized gains? Can a gain be realized but unrecognized? If so, please provide an example. How does the distinction between accounting and economic income relate to the definition of gross income?

Expert Solution

Recognized gains refers to the profit earned from the sale of an asset. Ex- (100 Shares purchase at $5- $500 and sold at $10- $1000, Hence, recognised gains here is $1000- $500= $500)

Realized gains is the amount earned from sale of an asset. Basically amount earned after deducting the costs associated with the sale. Ex- (100 Shares sold at $10 each and brokerage charged on this transaction is $5. Hence, realized gains here is $1000- $5= $995)

Recognised gain can be stated as the taxable part of the realised gains. More often than not, recognised gains and realized gains are the same.

Hence, the non taxable portion of the realised gains is called as unrecognised gain. For example, if the net amount received on the transaction is lower than the actual realised gains, then such portion will form part of unrecognised gains.

All realized gains and losses are considered for calculating accounting income.

All realized an unrealized gains and losses are considered for calculating economic income.

Hence, after deducting the unrealized gains and losses from economic income, we arrive at the gross income. Gross income considers only the realized gains and losses.

ekkarill92 answered 2 years ago

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