Future Business Leaders of America (FBLA) Accounting Practice Test

What does gain refer to in accounting terms?

1. An expense that reduces equity

2. An increase in equity from selling goods

3. An increase in equity from activities other than selling goods or services

4. A decrease in value of assets

The correct answer is: An increase in equity from activities other than selling goods or services

In accounting terminology, a gain refers to an increase in equity that arises from activities not primarily linked to the core operations of selling goods or services. This often involves transactions such as the sale of an asset for more than its carrying value, or income received from sources like investments or real estate. Such gains enhance the overall value of a company's equity, reflecting successful transactions in areas outside the normal business operations, thereby providing a broader perspective on the firm's financial health. While the distinction between different types of equity increases is crucial, specifically recognizing that a gain can arise from diverse sources underscores the importance of understanding the various facets of a company's financial interactions. This definition differentiates gains from regular revenue, which is tied directly to the company’s main operating activities. Therefore, it highlights why the answer focuses on activities distinct from the regular selling of goods.