Profits made by businesses fall into two categories:
- Capital profits
- 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.
Capital profits appear as a liability in the balance sheet.
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.