CAPITAL AND REVENUE PROFITS :

While preparing the final accounts, distinction has to be made between capital profits and revenue profits. Revenue profits are earned in the ordinary course of business. They appear in the profit and loss account and are available for distribution as profit, or for creating reserves and funds, or for being used in the business. However, capital profits are those which are earned as a result of selling some fixed assets, or in connection with raising capital for the firm. For instance, a building purchased for Rs.4,50,000 was subsequently sold for Rs.4,75,000, this Rs.25,000 will be profit of capital nature. Similarly, when a company issues its shares of the face value Rs.10 for Rs. 11 each, it is said that shares have been issued at a premium, the amount of premium being a capital profit. Capital profits are either capitalized i.e. transferred to capital account or transferred to capital reserve account which may be utilized for meeting capital losses.