What it means
In business and finance, tracking profits correctly is essential for accurate reporting and tax purposes. When you own an asset, such as company shares, equipment, or property, its market value changes over time.
If the value goes up, you have a paper profit, often called an unrealised gain. However, this wealth is locked up in the item itself and cannot be spent.
A realised gain only happens when you officially sell that asset to a buyer and receive payment. This distinction matters because tax authorities generally tax realised gains, not paper gains.
For non-finance managers, understanding this concept helps you see why your company cash flow might look very different from your asset portfolio value. You cannot pay salaries or buy inventory with an asset that has simply gone up in value; you need to sell it and realise the gain first.
Furthermore, reporting realised gains accurately on your income statement ensures your business stays compliant with accounting standards and gives stakeholders a true picture of operational success.
In practice
Real-world examples.
Example
As a tech entrepreneur, you bought company shares for 5,000 pounds. Today, they are worth 12,000 pounds, but you keep holding them. You have an unrealised gain of 7,000 pounds, but no realised gain yet.
Example
Your SME bought a delivery van for 15,000 pounds five years ago. You just sold it to a local courier for 8,000 pounds. Because its depreciated book value was 5,000 pounds, you have a realised gain of 3,000 pounds.
Example
A retail business purchased commercial property for 200,000 pounds. After local property prices surged, the business sold the building for 350,000 pounds, securing a realised gain of 150,000 pounds in cash.
Think of it
“Imagine you own a rare baseball card valued at 500 pounds on price guides. You do not have 500 pounds in your pocket until you actually sell the card to a collector and walk away with the cash.
Formula
Calculation
Realised Gain = Selling Price - Purchase Price (Cost Basis). Example: If your small business bought machinery for 10,000 pounds and sold it later for 14,000 pounds, your realised gain is 14,000 pounds minus 10,000 pounds, which equals 4,000 pounds.Case study
Seen in the real world.
BrightSpark Logistics, a mid-sized delivery firm, wanted to strengthen its cash position for an upcoming expansion. Two years ago, the company purchased surplus warehouse equipment for 40,000 pounds. Due to rising industry demand for logistics machinery, a competitor offered to buy this exact equipment outright for 55,000 pounds. BrightSpark accepted the offer and completed the sale, receiving the funds immediately. On their financial statements, the transaction generated a realised gain of 15,000 pounds, calculated as the 55,000 pound sale price minus the original 40,000 pound purchase cost. This successful sale turned paper value into hard cash, allowing BrightSpark to fund their new vehicle fleet without taking on bank debt. The finance manager ensured this 15,000 pound profit was properly recorded for tax reporting, illustrating how converting assets into realised gains directly supports strategic business growth.
Watch out
Common mistakes.
- Assuming paper gains mean you have extra cash available to spend immediately.
- Failing to account for original purchase costs or depreciation when calculating the final profit.
- Confusing unrealised gains with realised gains when planning your business tax obligations.
Questions
People also ask.
Are realised gains subject to business tax?
Yes, once you sell the asset and the gain is realised, it generally counts as taxable income or capital gains for your business.
What is the difference between a realised gain and an unrealised gain?
An unrealised gain is an increase in an asset value that is still on paper because you have not sold it yet. A realised gain is the actual profit collected after you complete the sale.
Do I need to report realised gains if I reinvest the money immediately?
Yes, the act of selling triggers the realisation event for accounting and tax purposes, regardless of what you plan to do with the cash afterwards.
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