Realized loss definition
/What is a Realized Loss?
A realized loss occurs when the sale price of an asset is lower than its carrying amount. This loss is only considered to be realized when the asset is removed from the entity's accounting records. Thus, a loss is only realized when the associated asset has been sold in an arm’s length transaction, donated, or scrapped.
Tax Treatment of a Realized Loss
A realized loss can be included on an entity's tax return as a reduction of taxable income. A business may choose to realize losses on as many assets as possible when it would otherwise have to pay taxes on realized profits or capital gains. This decision can result in assets being sold for a realized loss sooner than would normally have been the case.
Accounting for a Realized Loss
Accounting for a realized loss involves recognizing the loss in the financial statements at the time it occurs, typically when an asset is sold or disposed of for less than its carrying amount. The actions to be taken are as follows:
Remove the asset. The asset is removed from the balance sheet at its book (carrying) value.
Record proceeds. Any cash or other consideration received from the sale is recorded.
Recognize the loss. The difference between the asset’s book value and the proceeds received is recorded as a loss in the income statement.
Example of a Realized Loss
An investor pays $500 for several shares of stock. Two years later, he sells the shares for $400. His loss is the $100 difference between the purchase price and the sale price of the stock. However, he also paid a $20 commission to sell the shares, so his actual loss on the transaction is $120.