Meaning Of Capital Profits
The amount of profit earned by the business from the sale of its assets, shares, and debentures is capital profit. If assets are sold at a price more than their book values then the excess of book value is capital profit. Similarly, if the shares and debentures are issued at a price more than their face value, then the excess of face value or premium is capital profit. Such profit is not earned in the ordinary course of the business. It is not available for the distribution to shareholders as dividend. Such profits are transferred to capital reserve. It is used for meeting capital losses. It is shown on the liabilities side of balance sheet.
Meaning Of Revenue Profits
Revenue profit is the difference between revenue incomes and revenue expenses. It is earned in the ordinary course of the business. It results from the sale of goods and services at a price more than their cost price. Revenue profit is he outcome of regular transactions of the business. It is shown as gross profit and net profit in trading and profit and loss accounts. It is available for the distribution to shareholders as dividend or for creating reserve and fund for various purposes. It shows the efficiency of the business . In fact, earning revenue profit is the main objective of every business.
Difference between Capital Profit and Revenue Profit
Following are the main differences between capital profit and revenue profit.
- Mode Of Earning: Capital profit is earned by selling assets, shares and debentures at a price more than their book value and face value. Revenue profit is earned in the ordinary course of the business.
- Distribution: Capital profit is not available for the distribution to shareholders as dividend. Revenue profit is available for the distribution to shareholders as dividend.
- Use: Capital profit is transferred to capital reserve and used for meeting capital losses. Revenue profit is used to distribute dividend and create reserve and fund for various purposes.
- Treatment: Whenever, capital profit is made it should either be transferred to the capital account of the proprietor or credited to capital reserve account which would appear as a liability on the balance sheet. But capital profits should in no case be transferred to profit and loss account because it is non-trading profit. Revenue profits on the other hand should be transferred to profit and loss account because they arise out of regular trading operation.