Gains on a company's balance sheet reflect the positive difference between an investment's original purchase price and its market value. Companies often make short-term and long-term investments in the form of purchases of stocks and bonds. The price at which such an item is purchased becomes the recorded book value. The company is responsible for recording any potential gains or losses from the sale of those investments. Any positive difference between the book and market value is recorded in the stockholders' equity section of the balance sheet as an unrealized gain.
Gains and Balance Sheet Definition
A gain is considered to be an actual or unrealized profit that a company receives from the sale or the potential sale of an asset. The balance sheet contains three sections. There is a section that lists the company's assets, a section for liabilities, and a third section for stockholder's equity. When companies prepare a balance sheet, the dollar value of its assets must equal the dollar value of its liabilities plus its stockholders' equity.
In the asset section of the balance sheet, any short-term investments are listed at their purchase price or book value. Short-term investments are purchases of equity or bonds that the company intends to sell within one year. The book value indicates the recorded value of those investments. It is the amount that the asset is worth as long as it is held by the company. On the balance sheet, the entry may be listed as "short-term investments, at fair value" or short-term bonds and equities. Short-term investments have the potential to result in a gain if they are sold for a price above their book value.
Also in the asset section of the balance sheet are the listings for any long-term assets. These are investments that the company intends to hold for more than one year. Similar to short-term investments, they are listed at their book value. Some companies list them collectively on the balance sheet as "long-term assets." Others may list each investment separately. Long-term investments also have the potential to result in a gain if the company is forced to liquidate or sell.
Any potential gains on the sale of short-term and long-term investments are recorded in the stockholders' section of the balance sheet. A gain is typically listed as "unrealized gain on available for-sale securities." The amount of the potential gain is the difference between the book value and the market value at the time the balance sheet is prepared. For example, if a company has a book value of $30,00 for its investments and the current market value is $90,000, it would record an unrealized gain of $60,000. The amount of the unrealized gain is added to the total value of stockholder's equity.