The losses that a business may experience are divided into two types:
- Capital losses
- Revenue losses
Capital losses are losses made on the sale of a fixed asset or resulting from raising money for the business.
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 are losses incurred in trading operations, such as losses on the sale of merchandise.
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.