Capital and revenue profits are both two different types of business profits realized by a company during a financial year.
Capital profits are profits from sale of fixed assets or the issuance of shares and debentures to raise funds. These profits are non-recurring or irregular in nature and are not realized through the ordinary business activities of a company.
- The LMN company decided to sell its vehicle in the market for $15,000. The written down value of the vehicle is $10,000. The capital profit to be realized by the company if it sells the vehicle would be $5,000 (Purchasing price – Written down value).
- MNO company issued 1 million shares at $15 per share. The par value per share was $10. The company earned a capital profit of $5,000,000 ($5 per share × 1 million shares) and credited it to its share premium account.
Revenue profits are profits which are earned by carrying on the ordinary business activities of a company. They are recurring or regular in nature and are earned through the sale of stock-in-trade or provision of services to customers.
- The RST company manufactures baby diapers. The cost to make one diaper for the company is $5. It sold 1.5 million baby diapers at $8 per baby diaper during a year to retail companies and wholesalers combined. The revenue profit earned by the company is $4,500,000 during the year.
- A company gives financial advisory services to its clients at $25 per hour. The revenue profit earned by the company during the year was $28,800 after deductiung out-of-pocket and other ancillary expenses.
Summary and conclusion
- Capital profit is profit earned from sale of fixed assets or when a company issue shares to raise its capital. They are not earned through carrying out the normal business of a company.
- Revenue profit is profit earned from sale stock-in-trade or services. They are earned through carrying out the normal business of a company.
- Capital and revenue profits should never be confused with each other as it can lead to classification errors and result in an incorrect financial summary report.