Business accounting is very important for the success and operation of a company. While many owners choose to hire certified public accountants, others chose to handle business finances on their own. Regardless of how an owner handles the accounting, a basic understanding of certain accounting terms can make analyzing balance sheets and income statements easier.
Capital profit is money brought into the company primarily through internal measures. It is profit that is not earned in the regular course of the business. Capital profit includes items such as income from the sale of a fixed asset (property owned by the business and used in its trade), income from the sale of premium shares of stock and money brought into the business by investments or borrowed from partners, investors or financial institutions.
Revenue profit is the money the business earns through its particular trade. A retail store that sells goods, for example, earns revenue profit when sales of those goods occur. Revenue profit also includes money earned from investments and commissions. With regard to income statements, revenue profits are primary activities, whereas capital profits are secondary activities.
ABC Corporation manufactures electronic components and sells them to other electronics manufacturers. Its revenue profit consists of the money brought in from the sale of electronic components. If ABC sells one of its machines used to create the electronic components, it may realize a capital profit. The sale of the machine is a rare occurrence; ABC Corp. does not rely on those sales to turn a profit.
Reporting the Profits
Businesses generally report profits and losses on income statements. Income statements disclose the business’s gross and net profits for a given time period. Revenue factors into the total gross profit -- gross profit is the total revenue less the cost of sales. Businesses report capital profits differently. Capital profits are part of the company equity and can either be deposited into the company’s capital account or credited to the reserve account. If credited to the reserve account, the business should list the amount as a liability on its balance sheet.