What is the difference between revenue income and capital income

P2-explain the difference between capital and revenue items of expenditure and income. Capital income Capital income is income generated by investing into fixed assets over time, rather than from work done using the asset. If a business sell its property at a profit ,that profit is called capital gain and is taxable according to the period the property was held by the business before it is sold.

Examples of capital income are personal savings, bank loans acquired. In response to these questions, make sure to refer to the main principles of taxation equity, efficiency, adequacy of revenue, political feasibility, and cost of administration , tax and expenditure limitations, as well as the importance of revenue diversification for local government.

Averkamp, a university lecturer explains capital expenditure as the amount spent to either obtain or improve a long-term asset such as a building. This cost is recorded in an account that is classified as Property. Apart from the cost of land ever other cost is charged to the depreciation expense over the useful life period of the asset. A revenue expenditure on the other hand is an amount that is used immediately. They receive the difference between the monetary value at which it is sold and the cost they had to pay to make it.

List each of these five items and explain why each of these items is added subtracted from net income to calculate Net Cash Provided by Operating Activities. Purchase of stock-in-trade is not capital expenditure as it is sold in the ordinary course of business. Expenditure on the purchase and installation of machinery is a capital expenditure. Further when an expenditure is made with a view to bringing into existence an asset or advantage for the enduring benefit of trade is a capital expenditure in the absence of special circumstances leading to the opposite conclusion.

Asset or advantage of enduring nature means that it must not be fully consumed or used up in the accounting period in which it is incurred. Capital expenditure increases the earning capacity or reduces the operating expenses of a business. If an expenditure is made not for the purpose of bringing into existence any capital asset or advantage of enduring nature but for running the business or working it with a view to produce the profits is revenue expenditure.

Such expenditure benefits the current period only. It is incurred to maintain the existing earning capacity of the business.

For example, the amount spent on purchase of stock-in-trade is of revenue nature. Administrative expenses and selling and distribution expenses are other examples of revenue expenditure. Deferred revenue expenditure is a revenue expenditure by nature but it is not treated as revenue expenditure on the ground that its benefit is not fully exhausted in the accounting period in which it is incurred.

Deferred revenue expenditure is, for the time being, deferred from being charged against revenue. The unwritten off portion of the deferred revenue expenditure is shown on the asset side of the Balance Sheet.

A portion of the total deferred revenue expenditure is charged as revenue expenditure. Deferred revenue expenditure should be written off over a certain number of years. Deferred revenue expenditure should be distinguished from prepaid expenses. In case of deferred revenue expenditure the benefits available cannot be precisely estimated but in case of prepaid expenses, like payment of insurance in advance, benefits available can be precisely estimated.

In case of prepaid insurance, insurance protection will be available for a definite period after close of the financial year. It will benefit in future also. Earlier, it used to be treated as deferred revenue expenditure. The distinction between capital receipt and revenue receipt is important because capital receipt is taken to the Balance Sheet and revenue receipt is taken to the Trading and Profit and Loss Account. Capital receipts are the receipts which are not obtained in course of normal business activities of the enterprise.

The examples of capital receipts are :. Revenue receipts are the receipts which are obtained in course of normal business activities. They include proceeds from sale of goods, fee received from the services rendered in the ordinary course of business, receipts. Legal expenses incurred in an action for infringement of its trademark is revenue expenditure as it is incurred for maintaining an intangible fixed asset. Any expenditure which is reasonably large is capital expenditure is false as the amount of expenditure is usually not the criterion for deciding whether the expenditure is of capital nature or revenue nature.

The decision depends on the nature of the expenditure. Expenses incurred to keep the machine in working condition is revenue expenditure. Amount received from issue of shares is capital receipt as it is not obtained in the course of normal business activities. This team works under the guidance and supervision of Editor-In-Chief Mr.

Rakesh Bhargava. The Research and Editorial Team is responsible for developing reliable and accurate content for the readers. The team follows the six-sigma approach to achieve the benchmark of zero error in our publications and research platform. The team ensures that the following publication guidelines are thoroughly followed while developing the content:. You actually make it seem really easy together with your presentation however I to find this topic to be actually something that I believe I might by no means understand.

It kind of feels too complicated and extremely extensive for me. Valuable information. To avoid this scenario, the purchase of property should be classed as capital expenditure.

As a guide, the following are typical examples of capital expenditure:. As a guide, the following are typical examples of revenue expenditure:. What capital expenditure is to one company may not be capital expenditure to another. If you sell vans as part of your trade then the purchase of vans is not capital expenditure, it is revenue income as it is the sales of goods or services sold as part of your trade.

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Develop and improve products. List of Partners vendors. The differences between capital expenditures and revenue expenditures include whether the purchases will be used over the long-term or short-term. Capital expenditures CAPEX are funds used by a company to acquire, upgrade, and maintain physical assets such as property, buildings, or equipment.

Capital expenditures are typically one-time large purchases of fixed assets that will be used for revenue generation over a longer period. Revenue expenditures are typically referred to as ongoing operating expenses , which are short-term expenses that are used in running the daily business operations.

Revenue expenditures are short-term expenses used in the current period or typically within one year. Revenue expenditures include the expenses required to meet the ongoing operational costs of running a business, and thus are essentially the same as operating expenses OPEX. Revenue expenditures also include the ordinary repair and maintenance costs that are necessary to keep an asset in working order without substantially improving or extending the useful life of the asset.

Revenue expenses related to existing assets include repairs and regular maintenance as well as repainting and renewal expenses. Revenue expenditures can be considered to be recurring expenses in contrast to the one-off nature of most capital expenditures.

Other examples of revenue expenditures include the following:. Revenue expenditures or operating expenses are recorded on the income statement.

These expenses are subtracted from the revenue that a company generates from sales to eventually arrive at the net income or profit for the period. Revenue expenses can be fully tax-deducted in the same year the expenses occur. In other words, the expenses reduce profit from a tax standpoint, and thus, reduce the taxable income for the tax period.