Accountancy Class 11 – Classification of Income

CLASSIFICATION OF INCOME

(i) Capital Income. The term ‘Capital Income’ means an income which does not grow out of or pertain to the running of the business proper. It is synonymous to the turn ‘Capital Gain’. For example, if a building costing Rs 10,000 purchased by a business for its use is sold for Rs 15,000, Ps 5,000 will be taken as a capital profit.

However, it should be noted that only the profit realised over and above the cost of the fixed-asset shouki be taken as a capital frofit. The profit realised over and above book value of the asset till it does not exceed the original cost of the asset should be taken as a revenue profit though it does not strictly arise out of and in the course of regular business transactions. This is because, the depreciation against the fixed asset has already been charged to the Profit & Loss Account of the earlier years and any profit which is now made on the sale of a fixed asset (not exceeding the original cost of the fixed asset) is simply recovery of excess provision for depreciation made in the earlier years. This is also provided by the Income Tax Rules. For example, if a plant originally purchased for Rs 10,000 standing in the books at Rs 6,000 (on account of charging depreciation) is sold for P.s 12,000, there is a profit of Rs 6,000 on the sale of this plant Out of this profit, Rs 2,000 (i.e., the amount over and above cost of the asset) should be taken as a capital profit while the balance of Ps 4,000 should he taken as a revenue profit. Capital profit is transferred to the Capital Reserve and is shown in the Balance Sheet on the liabilities side while revenue profit is credited 10 the Profit & Loss Account.

Revenue Income. Revenue Income means an income which arises out of and in the course of the regular business transactions of a concern. For example, in the course of rnnning business, the profit is made on sale, of goods, income is received from letting out the business property, dividends are received on business investments etc. All such incomes are revenue incomes. It should be noted that the terms “Revenue profit’ and Revenue Income’ synonymous.