Capital and Revenue Receipts, Payments, Profits and Losses

Learning Objectives:

1. Define and explain and give examples of capital and revenue receipts and payments?
2. Define and explain and give examples of capital and revenue profits and losses?

Contents:

1. Capitalized and Revenue Receipts
2. Capital and Revenue Payments
3. Capital and Revenue Profits
4. Capital and Revenue Losses

Capitalized and Revenue Receipts:

Receipts refer to the actual amounts of cash received. They can be either of capital nature or revenue nature.

Capital receipts include the following:

1. Capital brought in by the proprietor at the commencement and any additions made subsequently.
2. Money borrowed from partners, bankers, private individuals etc.
3. Money received by the sale of fixed assets.
4. Money received on account of capital profit.

Revenue receipts include the following:

1. Money received by the sale of floating assets - by sale of goods.
2. Money received on account of some revenue profit.

Capital and Revenue Payments:

Definition and Explanation:

Capital payment is an amount paid on account of some capital expenditure and a revenue payment is an amount actually paid on account of some revenue expenditure. Expenditure is the full amount incurred whether paid or not, whilst payments refer to the amount actually paid.

Example:

If a building is purchased for $20,000 from X and $10,000 is paid in cash and the remaining sum to be paid after six months; $20,000 is capital expenditure, but $10,000 is only capital payment. Similarly if goods are purchased from X for 30,000 and $15,000 is paid in cash; $30,000 is revenue expenditure but only $15,000 is revenue payment.

Capital and Revenue Profits:

Definition and Explanation:

Capital profit means a profit made on the sale of a fixed asset or profit earned on raising monies for the business. For example a building purchased for $20,000 is sold for $25,000 the profit $5,000 thus made is a capital profit.

Revenue profit on the other hand is a profit made by the business e.g., profit on the sale of goods, income from investments, commission earned etc.

Whenever, capital profit is made it should either be transferred to the capital account of the proprietor or credited to capital reserve account which would appear as a liability on the balance sheet. But capital profits should in no case be transferred to profit and loss account because it is non-trading profit. Revenue profits on the other hand should be transferred to profit and loss account because they arise out of regular trading operation.

Capital and Revenue Losses:

Definition and Explanation:

Capital loss means a loss made on the sale of a fixed asset or a loss incurred in connection with the raising of money for business. Capital loss may be shown as an asset in the balance sheet. But as this asset is a fictitious nature, it would would advisable to write off it.

Revenue loss, on the other hand, is the loss incurred in trading operations such as loss on the sale of goods. Revenue losses are charged to profit and loss account of the year in which they occur.