Capital and Revenue Profits:

While preparing the final accounts, distinction has to be made between capital profits and revenue profits. Revenue profits are earned in the ordinary course of business. They appear in the profit and loss account and are available for distribution as profit, or for creating reserves and funds, or for being used in the business. However, capital profits are those which are earned as a result of selling some fixed assets, or in connection with raising capital for the firm. For instance, a building purchased for 4,50,000 was subsequently sold for 4,75,000, this 25,000 will be profit of capital nature. Similarly, when a company issues its shares of the face value 10 for ` 11 each, it is said that shares have been issued at a premium, the amount of premium being a capital profit. Capital profits are either capitalized i.e. transferred to capital account or transferred to capital reserve account which may be utilized for meeting capital losses. Mode Of Earning: Capital profit is earned by selling assets, shares and debentures at a price more than their book value and face value. Revenue profit is earned in the ordinary course of the business. Distribution: Capital profit is not available for the distribution to shareholders as dividend. Revenue profit is available for the distribution to shareholders as dividend.

Capital profit includes:

profit earned on the sale of fixed assets(excess of selling price over the cost price).The premium on issue of securities.Profit from the absorption of another firm.Discount on redemption of securities.Profits prior to incorporation.Profit remaining on Re-issue of forfeited shares.

Revenue profit includes:

Discount received.Profit from the sale of goods.Commission received.Interest received.Profit on the sale of fixed assets (excess of cost overwritten down value).Profit on sublet.

Recommended

Accrued LiabilitiesCapital StructureBook KeepingInterest on CapitalAccounting EstimatesDouble Entry SystemCapital Losses and Revenue LossesCapital Expenditure and Revenue ExpenditureCapital Receipts and Revenue Receipts