The difference between capital and revenue items of expenditure and income

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The difference between capital and revenue items of expenditure and income

Capital Income is the money that the owners and other investors have invested into the business to start it up or to buy additional equipment. Capital income is usually used to buy things that will stay in the business for a long period of time such as premises, vehicles, computes and other equipment. These are called fixed assets meaning that these things will usually stay in the business for some time. When the business is in its early stages Capital income is used to buy opening stock however as the business develops and starts to generate sales income that money should be used to pay for stock.   The source of where Capital income comes from usually depends on the type of business.

Depending upon the legal status of the business the type of income will vary. There are different types of capital income for the different types of legal status’s a business is in. The Capital Income for a sole trader would differ in many ways from a Partnership due to the fact a sole trader is solo and a partnership can have 2-20 members I it.

  • Sole trader – A sole trader is someone who own the business on their own; therefore they have to find the Capital income on their own or personal loans. Sole traders often invest their personal savings into the business or take out a bank loan an sometimes borrow from friends or family. If the business is a success other people can invest but that would not be the Capital Income because that period of time has passed when the business was in its early stages; therefore it is not Capital Income.
  • Partnership – This is when 2-20 people get together to set up a business; everybody has to contribute a certain amount of money to the Capital income; this will mean that the business has more amount of money available. The partners of the business will share decision making and the profit however in most partnerships any loans taken out are still secured by the partners’ own assets so just like a Sole Trader this is a high-risk option.
  • Limited Company – This is when a company has Shareholder which are the owners of the business, they all contribute to the Capital Income; shareholder usually receive voting rights and the more shares they own, the better the ability to influence decision making. Shareholders are rewarded for their contribution towards the business by the payment of a dividend; this is a share of the profits.  Depending on the amount of shares you have in a company the privileges you have such as: Getting a bigger share of the profits, having a greater influence on the decision making and having the ability to have a more general control on the business.
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Revenue income is the complete opposite to Capital Income. As Capital Income is an investment for a longer period of time as it’s used to start up the business and to later buy equipment required for the business which will stay over a long period of time and will not return the money spent to buy it in a short period of time. Revenue Income is not for a long period it is the day-to-day-function; it is over a short period of time.  The revenue Income is generated by the service/product that the business is selling. The revenue income depends ...

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