The losses that a business may experience are divided into two types:

  1. Capital losses
  2. 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.

Frequently Asked Questions

How is revenue loss in accounting calculated?

Revenue losses are calculated by using the formula: Revenues - Expenses = Revenue Loss.

How is a capital loss in accounting calculated?

Capital losses are calculated by using the formula: Sales Price – Cost of Goods Sold = Capital Loss.

Do capital and revenue losses offset each other?

No, capital and revenue losses do not offset each other. Capital losses are subtracted from capital gains for tax purposes. Revenue losses have nothing to do with revenue gains. They exist on their own and must be reported separately.

Can a company carry forward its net loss or loss carryback?

A Company can carry forward its net loss or loss carryback for tax purposes.

Does a capital loss benefit from depreciation?

No. A Capital loss is calculated based on the sales price of an asset after deducting costs associated with acquiring that asset; in other words, before any deductions are made for Depreciation expense. This means that the original value of an asset has no bearing on the amount of capital loss to be recognized.

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