Net ProceedsDefinition and How to Calculate it

What Are Net Proceeds?

When talking about Net Proceeds, they simply mean the amount that is left from the sale of a company’s asset after deducting all the related costs and expenses for selling the asset.

In accounting, a capital gains tax is computed for assets sold based on the net proceeds of the sale, and not on the gross proceeds.

Gross Proceeds refer to the amount that a seller receives for selling an asset which still includes the amount of the expenses needed to sell it.

The Net Proceeds on the other hand, is the final amount that the seller receives after deducting all the necessary expenses to bring the asset to a sale which includes any commissions or agency fees, advertising cost, repairs and maintenance, etc.

It should also be noted that in the computation of Net Proceeds, the cost of the asset sold is not included.

Net proceeds do not just refer to companies selling a part or all of their assets – it can also refer to individuals as well.

For example, the sale of a house.

Understanding Net Proceeds

The concept of Net Proceeds is important for people to understand.

A lot of times, people think that selling an asset at the highest price is always good.

It doesn’t always end up being good though.

Net Proceeds consider the cost and expenses of selling an asset.

Depending on the type of asset being sold, these related expenses can include legal and appraisal fees, professional fees, advertising and marketing fees, applicable taxes and other regulatory expenses.

Knowing the cost and expenses that go into a sale will help determine what the selling price should be rather than just throwing a random price based on the cost of the asset.

In an ideal scenario, the sale of an asset should result in positive net proceeds.

However, negative net proceeds can also happen.

When the cost of selling an asset is more than the selling price, the person or the company selling provides cash for the expenses.

In the case of a person selling a home that results in negative net proceeds, he would have to either pay cash or obtain approval from the bank for a short sale.

Net Proceeds in Capital Gains Taxes

In computing for the capital gains taxes on the asset sold, the basis amount should be determined which is the amount that was paid for the acquisition of the asset.

For example, an investor sells his shares of stock in a company for $10,000 and pays a broker commission of $100.

In the transaction, the net proceeds is $9,900 ($10,000 – $100).

When the same investor purchased his shares of stock a few years back, he paid $6,000 and a 10% commission equivalent to $600.

The basis amount therefore is $6,600 ($6,000 + $600).

To compute for the capital gains, the basis shall be subtracted from the net proceeds ($9,900 – $6,600) to arrive at $3,300.

The tax rate on capital gains will depend on the duration for which the asset was owned.

In case the stock was inherited and not purchased, the asset basis is no longer the gross proceeds of the stock but the fair market value on the day that the original owner of the shares of stock died.

Examples and Calculation of Net Proceeds

When selling a house, the calculation of the net proceeds include the selling price of the house less the cost and expenses necessary to sell it.

For example, Jane is planning to sell her house for $210,000.

In order to sell it, she has incurred the following expenses: agency fee of $12,000, advertising fee of $2,000, transfer fees of $1,800, pest inspection for $750, repairs that totaled $6,000 and closing cost of $10,000.

To compute the net proceeds, the total cost of selling the house should first be computed.

The total cost is $32,550 ($12,000 + $2,000 + $1,800 + $750 + $6,000 + $10,000).

The Net Proceeds therefore is $177,450 ($210,000 – $32,550).

Recording Net Proceeds and Associated Expenses

When an asset is sold, the books (particularly the Balance Sheet) must reflect the elimination of the asset and its corresponding accumulated depreciation.

Where DR stands for Debit and CR stands for Credit.

Upon Sale of the Asset

If an asset is purchased at $2,000 and has an accumulated depreciation of $900 and was sold for $1,300, the journal entry for this transaction is as follows:

DR: Cash $1,300

DR: Accumulated Depreciation $900

CR: Asset $2,000

CR: Gain on Sale $200

In the example above, the company credits a gain of $200 from the sale of the asset.

$200 = -1,300 + 2,000 – 900

Suppose the asset was sold for $800, the journal entry would then be:

DR: Cash $800

DR: Accumulated Depreciation $900

DR: Loss on Sale $300

 CR: Asset $2,000

When the market value of the asset exceeds its book value, the company has made a gain on the sale of the asset.

But when the market value is less than the value of the asset, the company is selling at a loss.