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.

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