Quick answer: Capital profits come from non-recurring transactions outside normal trading, such as securities premium or selling a fixed asset above its cost; they go to capital reserve and are normally not paid out as dividends. Revenue profits come from normal operations, such as profit on goods sold or commission received; they go to the profit and loss account and are available for dividends.
| Basis | Capital vs revenue profit |
|---|---|
| Source | Non-recurring vs normal operations |
| Treatment | Capital reserve vs profit and loss account |
| Dividend | Normally not distributed vs available |
| Example | Securities premium vs profit on sale of goods |
A business earns two kinds of profit. Revenue profits come from its normal, recurring operations, such as selling goods. Capital profits come from occasional transactions outside normal trading, such as selling a fixed asset for more than it cost. The difference matters because they are treated differently in the accounts and in what a company can pay out as dividends.
What are Capital Profits?
A capital profit is a gain from a non-recurring transaction that is not part of normal trading. It is transferred to a capital reserve, shown under reserves and surplus on the liabilities side of the balance sheet, and is normally not distributed as a dividend.
Examples of capital profits:
- Profit on sale of a fixed asset above its original cost
- Premium received on issue of shares or debentures (securities premium, which under Section 52 of the Companies Act, 2013 can be used only for specified purposes such as issuing fully paid bonus shares)
- Profit on acquiring another business for less than its net assets
- Discount on redemption of debentures
- Profit prior to incorporation
- Profit on reissue of forfeited shares
What are Revenue Profits?
A revenue profit is earned in the ordinary course of business and recurs from year to year. It is credited to the profit and loss account and is available for dividends.
Examples of revenue profits:
- Profit on sale of goods
- Discount received from suppliers
- Commission and interest received
- Rent received from subletting
- Profit on sale of a fixed asset up to its original cost (the excess over written-down value is really a recovery of excess depreciation)
Worked Example: Sale of a Machine
A machine cost ₹1,00,000. After depreciation its written-down value is ₹70,000. It is sold for ₹1,20,000. The total gain of ₹50,000 splits into two parts:
- Revenue profit: ₹1,00,000 − ₹70,000 = ₹30,000 (depreciation charged earlier that turned out not to be needed), credited to profit and loss
- Capital profit: ₹1,20,000 − ₹1,00,000 = ₹20,000, transferred to capital reserve
Capital Profit vs Revenue Profit
| Basis | Capital profit | Revenue profit |
|---|---|---|
| Source | Non-recurring, outside normal trading | Normal, recurring operations |
| Treatment | Capital reserve (balance sheet) | Profit and loss account |
| Dividend | Normally not distributed | Available for dividend |
| Example | Securities premium, sale of asset above cost | Profit on goods sold, commission received |
Related reading: capital losses and revenue losses, revenue income vs capital income and capital vs revenue expenditure.
