Question

Revenues, gains, and investments by owners are all increasing in net assets. What are the distinctions among them?

Short answer

Investments by owners are different from revenues and gains in that they indicate the transfer made by owners to the organization, and they do not arise from the activities done for the purpose of producing income. Revenues differ from gains as revenues arise from the ongoing operations of the business and gains arise from accidental transactions.

Step-by-step solution

Definition of Net Assets

Net assets are the assets obtained after deducting the company’s liabilities from its assets. Net assets are calculated by adding total current liabilities and total long-term liabilities and equities and deducting them from the addition of total fixed assets and total current assets.

Difference between revenues, gains, and investments by owners

Revenue arises in the ordinary course of business activities of an enterprise from the sale of goods, rendering of services, and use by others of enterprise resources yielding interest, royalties, and dividends. A gain is an increase in equity resulting from accidental transactions of an organization and from all other transactions and other events. Investment by owners refers to an increase in net assets of a specific certain enterprise arising from transfers made to it from other organizations of something of value to obtain or increase its ownership interests.

Revenue is obtained from the selling of goods or producing a service. A gain results from an increase in a non-operating activity. On the other hand, investment by owners occurs by an increase in net assets that were provided to the company from the owners.

Therefore, revenue, gains, and investments by owners differ from each other, though they result in an overall increase in net assets.