What type of account is used to record unrealized gains and losses under GAAP?

• A. A liability account
• B. A separate equity account for comprehensive income
• C. An expense account
• D. A revenue account

Answer: (B)

The correct choice is the separate equity account for comprehensive income because unrealized gains and losses are recognized in other comprehensive income (OCI) rather than in the net income reported on the income statement. Under GAAP, these unrealized items, which may arise from changes in fair value of certain investments or derivatives, are recorded in an equity account to reflect their effect on the company’s overall net worth without impacting its earnings for the period.

By placing unrealized gains and losses in a separate equity account for comprehensive income, GAAP provides a clearer picture of a company's financial position, apart from its operational performance reflected in net income. This treatment ensures that stakeholders can view total comprehensive income, which combines both net income and other comprehensive income, giving a more complete understanding of the company's financial situation.