Proceeds

Proceeds are the money or other value a person or business receives from a transaction such as selling an asset, issuing shares or bonds, or taking out a loan. Used on its own, the word usually means gross proceeds, the total amount received. Net proceeds is the amount left after deducting selling costs, commissions, underwriting fees and other charges directly tied to the transaction.

In accounting, proceeds are the starting point for measuring a gain or loss on a sale, the amount at which newly issued debt or equity is first recorded, and a line item in the investing and financing sections of the cash flow statement. In US tax law the related idea is the amount realized, and brokers report the gross proceeds of securities sales to the Internal Revenue Service on Form 1099-B.

Proceeds are simply what comes into your hands from a deal. If you sell a used car for $9,000 and pay a $300 listing fee, the proceeds are $9,000 and the net proceeds, what you actually keep, are $8,700.

Businesses use the same idea on a larger scale. When a company sells an old machine, issues bonds to investors or draws down a bank loan, it records how much money arrived and what it cost to get it. Whether the deal made or lost money depends on comparing those proceeds with what the item was worth on the company's books, not with what was originally paid for it.

The gain or loss on selling a long-term asset is the net proceeds minus the asset's net book value on the date of sale. A company sells equipment that cost $60,000 and has accumulated depreciation of $42,000, giving a book value of $18,000. The buyer pays $21,000 and a dealer charges a $500 fee, so net proceeds are $20,500 and the gain is $2,500.

The entry debits Cash $20,500 and Accumulated Depreciation $42,000, and credits Equipment $60,000 and gain on sale of assets $2,500. Debits and credits each total $62,500. Had the net proceeds been below $18,000, the difference would have been recorded as a loss. The same approach applies to any disposal of fixed assets.

• Bonds. A company issues bonds with a face value of $1,000,000 at 98, receiving gross proceeds of $980,000, and pays $15,000 of bond issue costs. Under US GAAP, issue costs are deducted from the carrying amount of the debt, so bonds payable are first carried at $965,000. The $35,000 gap to face value is amortized to interest expense over the bonds' life.
• Shares. A company sells 10,000 shares of $1 par common stock at $30 each. It credits Common Stock $10,000 and Additional Paid-In Capital $290,000. Costs of the issue, such as underwriting fees in an initial public offering (IPO), reduce additional paid-in capital rather than being expensed.
• Loans. Loan proceeds are the cash a borrower actually receives. If a lender withholds an origination fee, the borrower receives less than the principal it must repay, and the fee is treated as part of the loan's effective interest cost.

Cash received from selling property, equipment or investments is reported under investing activities at the full amount received. Under the indirect method, any gain on the sale is subtracted from net income in the operating section, so that the cash is not counted twice. Proceeds from issuing shares, bonds or loans are reported as cash from financing activities, and the later repayments appear in the same section.

For federal income tax, the amount realized on a sale is the cash received plus the fair market value of any property received and any liabilities the buyer takes on. Selling expenses reduce it. The taxable gain or loss is the amount realized minus the seller's adjusted basis in the property. For individuals, gains on assets held for more than one year are generally taxed as long-term capital gains. Brokers report gross proceeds of stock and bond sales on Form 1099-B, and real estate closings are generally reported on Form 1099-S.

• Internal Revenue Service: About Form 1099-B
• U.S. Securities and Exchange Commission