Explanation of the difference between capital and revenue items of expenditure and income
Introduction
In this report I will be writing about the differences between capital items and revenue items of expenditure and income. I will be describing what each term is and then give examples of how they are used along with what account they can be found in. At the end of the report I will conclude the information with the main differences between capital and revenue income and the differences between capital and revenue expenditure.
Capital Income
Capital income is money that comes into a business from things such as stock dividends or a loan from a bank. Capital income is therefore not money that comes from sales that the business has made rather it comes from outside of the business and is not directly connected to it. A couple of examples of capital income are sale of property and shares. Capital income is found in the balance sheet accounts because it is not related to the sales a business makes, so it fits into the balance sheet accounts because this document is also not concerned with the sales the business makes rather money that a business has/spends which is not related to profit. http://www.wisegeek.org/what-is-capital-income.htm Revenue Income
Revenue income is money brought into the business through the business activities so this is money generated through things such as the sale of goods or services. Revenue income is simply the money a company receives through its trading activities. Revenue income is calculated by multiplying the price that the goods of the company sell at by the number of units sold by the company. An example of revenue income is for example a company like Sony selling their products such as headphones...
... middle of paper ...
...erned with the profit the business makes.
The differences between capital and revenue expenditure are that capital expenditure is concerned with money that is spent to buy assets for the company, but revenue expenditure is concerned with the money that is spent on things such as running costs, petrol and wages of employees. Capital expenditure is concerned with the long term benefits of a business whereas revenue expenditure is the short term expenditures to provide instant gain for a company. They are found in two different accounting documents just like income. Capital expenditure is found in balance sheets because it is to do with money going out of the business that is not concerned with profit and revenue expenditure is found in income statements because it is concerned with the money going out of the business that is concerned with profit that a company makes.
...-based, charge-based, and contractual payment systems. (p. 7). CRC Press. Retrieved from http://books.google.com/books?id=sCzhN9HruM0C&dq=fee schedule based payment&source=gbs_navlinks_s
The series “High Profits” demonstrates the works and restrictions of the United States government regarding the issue of legalizing recreational marijuana. Breckenridge Cannabis Club business owners, Caitlin Mcguire and Brian Rogers, demonstrate both the struggles and profits of this up and coming industry. This series portrays virtually every viewpoint possible by including opinions from an array of political actors who discuss the influence of the government on this topic and the impact this topic has on the general public.
Marshall, M.H., McManus, W.W., Viele, V.F. (2003). Accounting: What the Numbers Mean. 6th ed. New York: McGraw-Hill Companies.
FASB Statement of Financial Accounting Concepts (CON) 5, Recognition and Measurement in Financial Statements of Business Enterprises, set forth the historic guiding principle to revenue recognition. Pursuant to paragraph 83, for revenue to be recognized it must be (a) realized or realizable and (b) earned. Revenues are “realized” when products, goods, services, or other assets are exchanged for cash or claims to cash. They are “realizable” when related assets received or held are readily convertible to known amounts of cash or claims of cash. Revenue is “earned” when an entity has “substantially accomplished what it must do to be entitled to the benefits represented by the revenues.” SEC Staff Accounting Bulleting (SAB) 104, Revenue Recognition issued in December 2003 provided additional guidance to when revenue is realized or realizable and earned setting forth four basic criteria: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the seller’s price to the buyer is fixed or determinable, and (4) collectibility is reasonable assured.
In order for a financial manager to be successful, all 3 of these areas of financial management must be executed properly. Working capital deals with a firm’s short term assets; capital budgeting is the process of planning and managing a firm’s long term investments; capital structure is the mixture of debt and equity maintained by a firm. All 3 of these areas entail different things as explained but together they make up financial management.
Total revenue, which is the total amount of income received from the sales of a certain quantity of goods or services. Total revenue can be calculated by multiplying the price of a product times the quantity sold. For instance, if 160 baseball caps are sold and each baseball cap was priced at $5 each, the total revenue would be (160*5) $180.
The revenue budget is based on forecasting future sales within an organization. With these forecasting future sales, it gives managers the opportunity to compare with other competitors and to effectively plan sales forecast and other relevant factors. Budgeting allows companies to make adequate estimates of how large a volume of items are needed, and how to select appropriate prices for sales. Secondly, we have the expense budget. This type of budget is found in all departments of an organization. Expense budgets deal with the primary activities undertaken by a company, to achieve their desired goals. Managers of each department should pay special attention to so-called fixed expenses that will remain relatively unchanged ...
Financial statements are those statements which provide information about profitability and financial position of a business. It includes two statements, i.e., profit & loss a/c or income statement and bal...
Income statements also called Profit and Loss statements (statement of earnings, income, or operations). These statements are used to report the company’s net profit or loss over a specified financial period. It is arrived by deducting the company’s expenses from the company’s total income.
Therefore, the amount of profit obtained is somewhat arbitrary. However, cash flow is an objective measure of cash and it is not subjected to a personal criterion. Net cash flow is the difference between cash inflows and cash outflows; that is, the cash received into the business and cash paid out of the business (Fernández, 2006). Whereas, net profit is the figure obtained after expenses or cost of resources used by the business is deducted from revenues generated from the business operations activities. Nonetheless, the figure for revenue and cash are not entirely cash, some of the items may be sold on credit and some of the expenses are not paid up
Research on the Sources of Finance for a Business Firms sometimes need to raise finance for Working Capital and Capital Expenditure. Explain what each is and give examples. · Working Capital (or Revenue Expenditure) The working capital is made up of the current assets net of the current liabilities. It is vital to a business to have sufficient working capital to meet all its requirements. Many businesses have gone under, not because they were unprofitable, but because they suffered from shortages of working capital.
A business generates cash from sale of products and services, sale of assets, borrowings from banks and other creditors and from capital contributions by its owners. It uses cash to pay for its operating and capital expenditure, its liabilities and in paying dividends to its owners. Information about sources and uses of cash are presented in the statement of cash flows.
The capital maintenance concept used results in differences between the relevance and faithful representation of the data that appears in the balance sheet and income statement. The difference between financial capital maintenance and physical is the treatment of unrealized holding gains and losses. Financial capital maintenance does not allow for unrealized holding gains and losses. Only realized gains and losses are included in income because they “are considered a return on capital” (Schroeder et al., 2013). This means, “income is measured only after the investment is recovered” (Gamble, 1981). Physical capital maintenance “consider[s unrealized holding gains and losses] as returns of capital and do[es] not include them income.” (Schroeder et al., 2013). Instead, they are treated as adjustments to equity and included in other comprehensive income. Therefore, with physical capital maintenance “an increase in an entity’s wealth as...
Income statement-: Income statement is the financial statement that measures a company 's financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities.
Financial statements are formal reports which show the current financial position of an entity. There are three main types of financial statements; the balance sheet, the income statement and the cash flow statement (Business Dictionary, 2016). Financial statement analysis refers to the analysis and interpretation of those three main financial statements. It can also be defined as understanding the risk and profitability of an entity (Ready Ratios, 2013). There are different techniques of financial statement analysis including ratio analysis, vertical or common size analysis and horizontal analysis or trend analysis. Another technique sometimes applied is trend analysis of the ratio analysis (Hancock, Robinson and Bazley, 2015).