The main objective of accounting is to ascertain the true profit or loss and to reveal the financial position of a business at the end of financial year.
To achieve the objectives, the business must take a clear distinction between its capital and revenue items. The distinction between capital and revenue items is essential for their correct treatment in the final accounts. Any incorrect treatment of those two items in the final accounts adversely affects the operating results and financial position of the business.
Capital is the wealth invested by an investor for producing additional wealth. The original figure of wealth is known as capital. Making of additional wealth with the investment of original capital is known as revenue. Thus, capital is the source of the basis of revenue. In other words, capital is invested in the business to earn revenue. For example, a trader has started a business with $ 1,00,000 and earns a profit of $ 30,000 during the year. The original investment of the trader, i.e $ 1,00,000 is the capital and the profit of $ 30,000 earned by the investor out of the investment is the revenue.
To achieve the objectives, the business must take a clear distinction between its capital and revenue items. The distinction between capital and revenue items is essential for their correct treatment in the final accounts. Any incorrect treatment of those two items in the final accounts adversely affects the operating results and financial position of the business.
Capital is the wealth invested by an investor for producing additional wealth. The original figure of wealth is known as capital. Making of additional wealth with the investment of original capital is known as revenue. Thus, capital is the source of the basis of revenue. In other words, capital is invested in the business to earn revenue. For example, a trader has started a business with $ 1,00,000 and earns a profit of $ 30,000 during the year. The original investment of the trader, i.e $ 1,00,000 is the capital and the profit of $ 30,000 earned by the investor out of the investment is the revenue.
Capital items concerned with the payment for assets and receipt from the owners and outsiders. It is the item of the balance sheet. It is of long-term nature and its benefit is long-lasting. In fact, capital items are assets, liabilities and capital that determine the financial strength of the business.
Revenue item is concerned with the payment for producing or buying goods and receipt from sale of goods and services. Those revenue incomes and expenditures are the items of trading account and profit and loss account. It is of short-term nature. Its benefit expires within the year. In fact, revenue items are incomes and expenses, which determine the operating result (profit or loss) of the business.
The following capital and revenue concepts are relevant for accounting purpose
* Capital and revenue expenditures
* Capital and revenue receipts
* Capital and revenue losses
* Capital and revenue profits
* Capital and revenue reserves