Capital and revenue losses
Capital and revenue losses are both two different types of business losses realized by a company during a financial year.
Capital losses are losses realized on sale of fixed assets or when a company issues shares at a discount to the general public. These losses are not recurring and are not realized through the normal business activities of a company.
- The NOP Company decided to sell its production plant in the market for $65,000. The written down value of the plant is $70,000. The capital loss on the sale of plant realized by the company is thus $5,000 (Purchasing Price – Written Down Value).
- The ABC company decided to sell its shares at a discount of 10% as the demand for its shares for the past ninety trading days has been very low. It issued 1 million shares at $9 per share (par value per share was $10) and thus incurred a capital loss of $1,000,000.
Revenue losses are losses which are realized by carrying on the normal business activities of a company. They occur as a result of sale of stock-in-trade or provision of services to customers at a price that is less than the cost.
The UVW Company manufactures plastic bottles. It sold 2 million plastic bottles during the year to various customers. The cost to produce each bottle is $3 and they sell it for $5 per bottle. Due to some reasons, the demand for the plastic bottles decreased during the last two months so the company had to reduce its selling price to $2 per bottle. The company incurred a loss of $1 per bottle during the last 2 months.
Summary and conclusion
- Capital loss is loss realized on sale of fixed assets or when a company issues shares at a discount. It is not realized through carrying out the normal business of a company.
- Revenue loss is loss realized from sale of goods or services at selling price which is lower than cost. It is realized through carrying out the normal business of a company.
- Capital and revenue losses should never be confused with each other as it can lead to classification errors and result in an incorrect financial summary report.
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