Question 7: Explain the meaning of gain and profit. Distinguish between these two terms.
Answer:
Gain− It arises from irregular activities or non-recurring transactions. In other words, a gain is a result of transactions that are incidental to the business, other than operating transactions. For example, an old machinery of book value Rs 20,000 is sold at Rs 25,000. Hence, the gain is Rs 5,000 (i.e. Rs 25,000 − Rs 20,000). Here, the sale of the old machinery is an irregular activity; so, the difference is termed as gain Thus, in other words the only difference between profit and gain is that profit is the excess of revenue over expense and gain arises from other than operating transactions.
Profit− Excess of revenue over expense is known as profit. It is normally categorised into gross profit or net profit. It increases the owner’s capital as it is added to the capital at the end of each accounting period. For example, goods costing Rs 1, 00,000 is sold at Rs 1,20,000, then the sale proceeds of Rs 1,20,000 is the revenue and 1,00,000 is the expense to generate this revenue. Hence, accounting profit of Rs 20,000 (i.e. Rs 1,20,000 − Rs 1,00,000) is the difference between the revenue and expense that is earned by the business.
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