Amount realized is the total amount of compensation that is received when selling some type of good or service to a buyer. This amount may be in the form of a gain of some type, if the seller is able to move the products at a profit. When the good or service is sold at a loss, the amount realized is presented as a negative figure. The calculation of this amount is helpful when preparing tax returns, as it is necessary to determine if any gains were made that are subject to taxes, of if the amount lost could be eligible for some sort of tax deduction.
Unlike other calculations that have to do with sales of goods and services, the amount realized focuses solely on the actual amount that is paid for the products and does not reflect any ancillary or related costs. This means that the figure does not include other expenses such as the cost of transporting the products to the buyer, or providing a sales commission to a salesperson or agent for their role in the selling activity. Expenses of those types are accounted for in other ways but do not change the amount realized.
A basic approach to determining the amount realized calls for identifying what is known as the total consideration for the transaction, then subtracting the cost basis from that amount. The total consideration is the total amount paid by the seller in order to acquire the asset in question, while the cost basis is value of the asset that is adjusted for depreciation or other factors that impact the taxable value of that asset. Once the subtraction of the cost basis from the total consideration is complete, the remaining figure constitutes the amount realized.
It is important to note that in the process of determining the amount realized, the total consideration may also include the transfer of any indebtedness that is currently attached to the asset that is sold, as well as any cash payments tendered to the seller. For example, if a car owner wishes to sell a vehicle that is not completely paid for, the deal may be structured so that the buyer pays a certain amount to the seller and also assumes responsibility for the remaining payments due on the car loan. When this is the case, the total consideration will include both the cash paid to the seller and the total balance remaining on that car loan. This is because the seller is realizing not only cash from the sale but also the consideration of no longer being responsible for that car loan.