Profits made by businesses fall into two categories:

  1. Capital profits
  2. Revenue profits

Capital Profits

Capital profits are the profits earned on the sale of fixed assets. For instance, selling a machine costing $3,000 for $4,000 generates a profit of $1,000.

Capital profits appear as a liability in the balance sheet.

Revenue Profits

Revenue profits result from trading. For instance, selling merchandise costing $6,000 for $9,000 generates a revenue profit of $3,000.

Revenue profits are transferred to the income statement of the year in which they occur because they arise out of regular and nominal business activities.

Frequently Asked Questions

What is the difference between capital and revenue profits?

Capital profits are the profits earned on the sale of Fixed Assets. For instance, selling a machine costing $3,000 for $4,000 generates a profit of $1,000. Revenue profits result from trading. For instance, selling merchandise costing $6,000 for $9,000 generates a revenue profit of $3,000.

What is the difference between fixed assets and inventory?

Fixed Assets are tangible or intangible resources that benefit the business throughout several accounting periods through their use in operations. For instance, a computer used by the company for five years qualifies as a fixed asset. Inventory refers to items ready for sale such as food products and raw materials. Once purchased, inventory items become assets and remain on the company premises until they are sold.

What is the difference between revenue and trading expenses?

Revenue profits result from trading. For instance, selling merchandise costing $6,000 for $9,000 generates a revenue profit of $3,000. Trading expenses refer to the costs of operating a business such as rent, telephone and electricity bills.

What is a capital expense?

Capital expenses are costs that benefit the company for more than one accounting period because its use contributes to generating revenue. The purchase of a car used in the course of the business's operations qualifies as a capital expense. On the other hand, buying office supplies is not a capital expense because it does not benefit the company beyond one accounting period.

What are some examples of capital expenses?

Some examples of capital expenses include: photocopiers, ovens, furniture and cars.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

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