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Business transactions (Capital income (The proceeds of selling fixed…
Business transactions
Capital income
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Includes the sale of tangible fixed assets, fixed asset investments, government grants, and the introduction of fresh money to help the business grow
The profit or loss from the sale is transferred to the profit and loss account for the accounting period when the sale took place
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Capital expenditure
Expenditure that is likely to provide a benefit to the organisation for more than one accounting period / financial year
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Incurred on the purchase of fixed assets such as land and buildings, plant and machinery, vehicles and fixtures and fittings
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Concerned with purchasing high-value, long-term and permanent fixed assets for use in business, these are not bought to be resold
Revenue expenditure
Expenditure on the supply and manufacture of goods and provision of services charged in the accounting period in which they are consumed
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Likely to provide benefit to the organisation for only the current accounting / financial year so is charged against profits in the period to which it relates
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Includes running costs, such as electricity, business rates, wages and salaries of employees, interest charges, purchase of consumables such as stationery and goods purchased for resale
Revenue income
Amounts derived from the provision of goods and services falling within the company's ordinary activities, after deduction of returns, trade discounts and value added tax
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Includes income from the sale of goods to customers, rents received, dividends received, interest received etc
The distinction between capital and revenue items is critical, if not classified correctly, the accounting profit will be incorrectly calculated
If a capital expenditure item is included as revenue expenditure, then the annual profit will be understated
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Commercial organisations generally engage in trade with the objective of generating a profit. This is usually made possible through the purchase and sale of goods and services
Generally the proceeds from a sale are classified as income, however income can be subdivided into two types: Capital and Revenue