Gain/Loss on Investment
Gain or Loss on investment is the profit or loss that investors receive from their investment such as shares, bonds, and other investments. It is the price difference between the initial investment cost and the selling price. It refers to the total realized gain and loss that results from the selling of financial security.
There are many types of investments which the company can purchase and make a profit. These investments include other company’s bonds, stock, real estate, options, future, investment funds, and so on.
Investor spends their money to purchase different kinds of investments and expect to get more value over time. When the selling price is higher than the purchase price, it means the investor is making a profit over their investment. It is the gain on investment.
On the other hand, if an investor sells their investments at a lower price compared to the initial purchase. It means they are making losses, also known as a loss on investment.
Gain or Loss on investment does not take into account the price change in the capital market. Investments such as bonds, stocks, and other financial instruments are traded in the capital market. Their price always changes depending on supply and demand in the market.
Even the price increase, but the investors still hold their investment, there is no gain on investment. If the price drop, there is no loss on investment. It is just the temporary difference between company book value and market value.
Gain/Loss on Investment Formula
|Gain/(Loss) = Selling Price – Initial Cost|
- Selling price: is the consideration received when investors sell their investment.
- Initial Cost: is a cost that company spends to acquire the investment.
Gain when Selling price > Initial Cost
Loss when Selling price < Initial Cost
Gain/Loss on Investment Journal Entry
Investment is the assets recorded in the company’s balance sheet. When the company sells investments, it means they remove them from the balance sheet. In exchange, they will receive the cash or accounts receivable.
Gain on investment means that company receives cash more than its book value. So they need to debit cash and credit investment. The difference between investment and cash received is the gain that needs to record on the credit side.
|Gain on Investment||000|
Cash will increase based on the amount received while the investment is removed from balance sheet. The difference is the gain on investment which will be present in the income statement.
Opposite to gain, loss on investment happens when company sold an investment for less than the book value.
|Loss on Investment||000|
Cash will increase while investment decrease from balance sheet. However, the cash receive is smaller than the investment, so we need to add another account which is the loss on investment. It is the balancing figure between cash and investment, and it will present on the income statement.
Example of Gain/Loss on Investment
Company ABC decides to invest its surplus cash in the stock market. $ 100,000 has been spent to purchase 100 shares of XYZ Company. Five years later, XYZ company has been doing very well, profits keep increasing every year, and their share price also increased.
Company ABC decides to sell its investment for $ 500,000.
Gain/(Loss) = 500,000 – 100,000 = $ 400,000 Gain
It means Company ABC gain $ 400,000 from their investment in XYZ share.
After selling the share, they have to make the following journal entry by debiting cash, credit investment, and gain.
|Gain on Investment||400,000|
The company receives cash of $ 500,000 from the sale of its investment. They have to remove the investment account of $ 100,000 from balance sheet as they no longer own it. At the same time, they need to record a gain on investment $ 400,000 on income statement.
Gain on investment Vs Return on Investment
Return on investment is the amount of cash that can be generated from the investment or financial security. It is the cash flow that investors receive while holding the investments. The returns have different forms depending on the investment.
- Bonds: return on investment refer to the interest income which investor received annually.
- Share: return refers to the dividend paid by the company, it can be various depend on the board of director
- Other investment: the profit which generates to the shareholders.
Gain/(Loss) on investment does not take into account the annual return which investors receive. Both should be included to measure investment performance as they will reflect the full picture.