Net gain is a source of increasing equity capital. Its negative result, which causes a decrease in equity capital, is called a loss (J. Bull, S. Brownlie 2015, pp. 1). Achieving a profit from conducting business activity is a basic condition for the development of a company. Profit gives the opportunity to improve and expand existing production.
Profit is directly related to the functions of the business of the company (J. Bull, S. Brownlie 2015, pp. 6-7 ):
- affects the investment capacity of the company,
- the distribution and amount of profit are determined by the self-financing of the production project,
- has a significant impact on the size of employment,
- has a motivational role.
In accordance with the balance sheet method, net profit means a positive adjustment of the initial state of equity, because the increase in the assets which were generated by the company affects the owners of the company on the account and they will decide on its allocation (J. Bull, S. Brownlie 2015, pp. 6-7 ). The distribution of this surplus may consist, for example, in the fact that a part will be accepted as dividends and a part will be credited to the capital of the company. A negative result will determine the loss, which in the end will decrease the equity capital of the company (J. Bull, S. Brownlie 2015, p. 7 ).
Nature of the gain
The result of the net gain may be of a nature (A. Auerbach et all., 2000, pp. 355-356):
- Negative - causes a decrease in capital, called a loss. It prevents a company from growing, in practice means that operating costs are higher than revenue and the company may be unprofitable or poorly managed.
- Positive - is the basic objective of any company, enabling its development and investment. Positive net gain may be distributed to the owners of the company or shareholders in the form of dividends.
Net gain vs gross gain - differences
The difference between net and gross gain is a very simple matter to calculate. Gross gain is the total of our income. Net gain is the part of gross gain that is not burdened with additional duties. In other words, net gain is the margin on sales and other economic activities, but after deducting the costs of those activities and taxes to the State (A. Auerbach et all., 2000, p.358).
Difference between income and gain
The concept of gain is not clear and is perceived in a completely different way by accountants, civil servants or stock market investors. In the field of economic sciences of theoretical systems typifying the notion of gain or income, a great deal has been created (K.A. Campbell, G. Nell 2009, pp. 5-6). Income can be defined as the total amount of financial income that we have realised in a given period of time. If we deduct from income taxes and all receivables that we have to pay due to state coercion, then we can talk about gain. In such a way, the concept of income can be equal to the concept of gross gain (K.A. Campbell, G. Nell 2009, pp. 5-6). However, this is a less popular and worse interpretation, because there are now two more conceptual pairs that distinguish between the issues at stake here: net gain- gross gain and income - revenue. The definition of income itself refers to it as money received or left by the taxpayer in a given calendar year and monetary values (D. Bernhardt, H. Lloyd-Elli 2000, pp.147).
The allocation of net gain and its consequences
The profit generated is the basis for financing, which guarantees the development of the company and the achievement of certain benefits by shareholders (T.L. Hungerford 2012, pp.2). It is also an element that has a significant impact on the image of the company's financial standing. Net gain calculated in accordance with the rules of the balance sheet law for the financial year, usually cannot be fully allocated to dividend, and on the other hand, it is not the only source of possible payments within the distribution of profit of capital companies. Therefore, the maximum amount to be distributed may be higher or lower than the net gain disclosed in the last financial statement of the reporting entity (D. Bernhardt, H. Lloyd-Elli 2000, pp.147-148).
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Author: Rafal Maslyk