The losses that a business may experience are divided into two types:
- Capital losses
- Revenue losses
Capital Losses
Capital losses are losses made on the sale of a fixed asset or resulting from raising money for the business.
Example
An example of a capital loss is when an investment listed in the books at $48,000 is sold for $45,000; this leads to a capital loss of $3,000. Also, a discount on the issuance of shares or debentures is a capital loss.
Capital losses appear as assets in the balance sheet.
Revenue Losses
Revenue losses are losses incurred in trading operations, such as losses on the sale of merchandise.
Example
As a case in point, merchandise costing $6,000 is sold for $4,000. In this situation, the loss of $2,000 is a revenue loss.
Revenue losses appear in the income statement of the year in which they occur.
