Gains that arise from an increase in the value of an asset that has not been sold or a decrease in the value of a liability that has not been transferred. When an asset is sold (and as such de-recognized from an entity’s financial statements), or when a liability is transferred (and as such de-recognized from financial statements), gains would materialize (i.e., become realized gains). Paper profit (unrealized gains) is recorded in an account called “accumulated other comprehensive income” (AOCI), which is presented in the owner’s equity section of the statement of financial position. These result from changes in the value of assets that have not yet been recognized or from changes in the value of liabilities that have not been settled.

The existence of an unrealized gain in the financials of an entity may imply its intent to hold an asset or a liability in expectation of further gains, rather than converting it to cash now. This may also be considered for tax purposes as in the case an entity expects that a longer holding period will have a positive impact on its taxation- i.e., a lower tax rate.

A prime example of an unrealized gain is an increase in the market value of shares designated as available-for-sale (AFS) by the holder. In accounting treatment, for this unrealized gain, an entity has to debit the asset account “available-for-sale securities” and credit the account “accumulated other comprehensive income” in the general ledger.

Paper profit is also known as paper gains.