Capital income is a one-off receipt that does not come from normal trading, such as the sale of a fixed asset, new share capital or a loan. Revenue income is the regular income earned from the main business, such as sales, fees, rent, commission and interest. Revenue income goes to the Profit and Loss Account; capital income affects the balance sheet.
There are two types of sources of income in a business. First, is capital income, and second is revenue income. There is a difference between the income sources of business.
The following are the main differences between capital income and revenue income with examples.
What is Capital Income?
The income that arises from non-recurring transactions or one-off events is called capital income.
Capital Income Examples:
- Price received on investments in small saving schemes.
- The premium on letting out shops or houses.
- Bonus shares on investment.
- Hidden treasures were found in the dismantling of the old house.
There are also some capital losses and revenue losses in a business.
What is Revenue Income?
Income arising from Recurring transactions in the ordinary course of business is called revenue income.
Revenue Income Examples:
- Commission received.
- Discount received.
- Interest from debtors.
- Fees and room rent from patients.
- Donations and charities received by the charitable institution.
- Freight received by transport companies.
- Interest and dividends received by the investment company.
Capital Income vs Revenue Income: 11 Differences
| Basis | Capital income | Revenue income |
|---|---|---|
| 1. Nature | Non-recurring, one-off | Recurring, regular |
| 2. Source | Sale of fixed assets or investments, new capital, loans | Normal operations: sales, fees, commission, interest |
| 3. Link to business | Not part of day-to-day trading | Part of day-to-day trading |
| 4. Where recorded | Balance sheet (or capital reserve) | Profit and Loss Account |
| 5. Effect on profit | Does not change normal trading profit | Increases the year’s profit |
| 6. Dividends | Generally not distributed as dividend | Can be distributed as dividend |
| 7. Effect on assets or liabilities | Reduces an asset or increases a liability or capital | No such effect |
| 8. Size | Usually large lump sums | Usually smaller, regular amounts |
| 9. Frequency | Occasional | Throughout the year |
| 10. Tax treatment | Usually taxed as capital gains, if at all | Taxed as business income |
| 11. Examples | Sale of old machinery, issue of shares, loan received | Sale of goods, rent, commission, interest earned |
Worked Example
A furniture shop sells an old delivery van for ₹1,20,000 and, in the same month, sells furniture worth ₹3,00,000. The ₹1,20,000 from the van is capital income: it is a one-off receipt from a fixed asset and is recorded against the van in the balance sheet (any profit over book value goes to capital profit). The ₹3,00,000 from furniture sales is revenue income, recorded in the Profit and Loss Account because selling furniture is the shop’s normal business.
