Capital and Revenue Profits and Losses:
Capital Profits:
Capital profit is a
profit which is earned, on the sale of a fixed asset
or profit earned on raising capital for a company
(by issuing shares at premium). This is not a
regular profit of the business and is not earned in
the ordinary trade of the business. For example, if
a machinery having book value of $50,000 is sold for
$60,000, the profit of $10,000 will be a capital
profit. In the same way, a joint stock company
issues shares of $ 2,00,000 at a premium of $10,000
to raise capital, such premium of $10,000 will be a
capital profit.
In this connection
the distinction between capital receipt and capital
profit may be noted. A machinery of $50,000 is sold
for $60,000. Here capital receipt is $60,000 and
capital profit is $10,000. This type of profit is
not recurring and regular. It will be shown on the
liability side of the Balance Sheet under the head
"Capital Reserve".
Revenue Profits:
This is a profit
which is earned during the ordinary course of
business e.g. profit on sale of goods, rent
received, interest received etc.
Capital Loss:
This is a Joss
suffered by a business on the sale of a fixed asset
or it is incurred on raising capital of a joint
stock company. This is not a recurring loss and is
not made in the ordinary course of the business.
e.g. A machinery having book value of $50,000 is
sold for $45,000, the loss of $ 5,000 is a capital
loss. In the same way, a company issued shares of
$1,00,000 at 10% discount, the loss of $10,000 (10%
of $1,00,000) is a capital loss. Capital loss is
sown in the Balance Sheet on the asset side as a
fictitious asset which is gradually written off out
of the profits every year.
Revenue Loss:
This loss is made
in the ordinary course or day to day operation of a
business such as loss on sale of goods etc. Revenue
loss appears in the profit and loss account or
income statement in the year in which it occurs.
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