Capital and revenue profits

Profit made by the business are of two types:-

  1. Capital profits
  2. Revenue profits

Capital profits

Profits earned on the sale of fixed asset is capital profits. For instance, if a surplus machine costing $3,000 is sold for $4,000 the business earns a profit of $1,000. It is a capital profit. Capital profits appear as liability in the balance sheet.

Revenue profits

Revenues profit is a profit made by trading, for instance, merchandise costing $6,000 is sold for $9,000, the profit of $3,000 is a revenue profit.

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

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