Questions:
Jack, an investor, buys 1000 shares of Carhub Ltd. at a price of $20 per share in 2020. He plans to hold it for the long run. After a year, the price of one share of Carhub Ltd. increases to $30. After 2 years, the share price of Carhub Ltd. suddenly decreases to $15. Seeing no potential growth in Carhub Ltd. in longer run, Jack sold all his investments in Carhub Ltd.

What is the amount of profit/loss Jack has made in 2 years from his investment in Carhub Ltd.?

Is this profit/loss realized or unrealized? What would be the double entry recorded for this gain/loss?

Reference answers:
Cash Outflow = 1,000 * $20 = $20,000

Cash Inflow = 1,000 * $15 = $15,000

Net Profit/(Loss) = $15,000 – $20,000 = ($5,000)

The amount of loss incurred by Jack is $5,000.

The loss incurred by Jack is realized. Realized Profit/Loss is the actual amount of profit or loss incurred on the sale of the underlying asset or investment. It can be calculated only when the asset is sold. On the other hand, Unrealized Profit/Loss is the increase or decrease in the value of an asset or an investment that an investor holds but has not sold it yet. It is calculated based on the market value of the underlying asset or investment.

In the case above, since Jack sold his investment in Carhub Ltd., therefore the loss he made was realized.

# Double Entries:
For realized loss, the double entry passed in the ledger book would be:

                                                    $                $
Dr.         Cash                                                     15,000
Dr.         Realized Loss on Sale of Shares         5,000
Cr.         Investment in Shares                                     20,000