Capital income and Revenue income
1)
Introduction:
Definition of income
“Income means
money received, especially on a regular basis, for work or through investments”
Or
“Money that an individual or business receives in exchange
for providing a good or service or through investing capital”
Income is consumed to fuel day-to-day expenditures. In
businesses, income can refer to a company's remaining revenues after all
expenses and taxes have been paid. In this case, it is also known as
"earnings". Most forms of income are subject to taxation.
Income
vs Revenue
Many
people mistake “income” and “revenue” as the same thing. However, there are
many small differences between the two financial concepts.
Both
“income” and “revenue” are financial and business terms. Their meanings closely
resemble each other because they are often used in the same context. Both
concepts are applicable in accounting and economic disciplines.
“Revenue,”
for instance, is the total amount of money that a business earns by doing its
activities. These activities include selling a product or a service, but it can
also be earned by an indirect means. Indirect business revenue
can be gained if a business has placed money in investments.
On
the other hand, “income,” also known as “net profit,” is the money left for a
business after it subtracts costs and expenses from its revenue. Costs and
expenses include the operational costs (salaries and wages, upkeep of
machinery, security, expenses for raw
materials, to name a few), depreciation, and capital. Costs can be categorized
into many types (usually in tandem) that include fixed and variable costs, direct
and indirect costs, and lastly, product and period costs. Income can also be
categorized as positive or negative. Positive income means there is more
revenue or less expenses while negative income accounts for a low revenue or
high expenses.
Under
section 2 (29) of income tax ordinance 2001
(29) ―income includes any amount
chargeable to tax under this Ordinance, any amount subject to collection [or
deduction] of tax under section 148, [150, 152(1), 153, 154, 156, 156A,
233, 233A and], sub-section (5) of
section 234, [any amount treated as income under any provision of this
Ordinance] and any loss of income but does not include, in case of a
shareholder of a company, the amount representing the face value of any bonus
share or the amount of any bonus declared, issued or paid by the company to the
shareholders with a view to increasing its paid up share capital;
2)
Capital Income:
Definition
of capital
“Wealth in the form of money or other assets owned by a
person or organization or available for a purpose such as starting a company or
investing”
Capital
Income: Cash or goods used to
generate income by investing in business or
other property.
Example: Investment in shares and
gain on sale of asset.
The term “Capital Income” means an
income which does not grow out or pertain to the running of the business
proper.
Capital
Profit
·
Cost of the Building – 1,00,000/-
·
Selling Price of the Building –
1,50,000/-
·
Capital Profit = 50,000/-
Which implies profit realized over
and above the cost of the fixed asset should be considered as Capital Profit.
Capital
income is the money invested
by the owners or other investors that is used to set up a business or buy
additional equipment.
3)
Revenue Income:
Definition
of revenue
The income generated from sale of goods or services, or any other use of capital or assets, associated with the main operations of an organization before any costs or expenses are deducted.
Revenue
Income: which is earned or
generated by sales of goods or services.
“Revenue
Income means an income which arises out of and in the course of regular business
transactions of a concern”
Revenue
Profit
·
Cost Price of Plant = 1,00,000/-
·
Book Price of Plant (After
Depreciation)= 70,000/-
·
Selling Price = 1,20,000/-
·
Profit = 1,20,000 – 70,000 =
50,000/-
So here Profit has two components
namely Capital Profit + Revenue Profit = 20,000 + 30,000
Revenue
Profit
“The profit realised over and above
the book value of the asset till it does not exceed the original cost of the
asset should be taken as revenue profit”
Revenue
income is the money that
comes into the business from performing its day-to-day-function, like selling
goods or providing a service.
4)
What
are included in income:
1) Profits
or gains
2) Income
from exports
3) Income
from imports
4) Winning
income
5) Any
loss of income
5)
What
are not included in income:
1) The
amount representing any face value of any bonus shares.
2) Amount
of any bonus declared issued or prayed by company to its share holders.
6)
Difference
between capital income and revenue income:
Following are the differences between capital income
and revenue income;
A)
Sale
of asset
Any amount which is
received by the sale of fixed asset is capital income.
And,
Any amount which is
received by floating asset is called revenue income.
B)
Substitution
of income
Any amount received in
substitution of a sources of income is a capital income.
And,
Any amount which is
received in substitution of income alone is called revenue income.
C)
Surrender
of rights
If any amount which is
received against completely surrendering his right of ownership, copyright,
trade mark etc, is called capital income.
And,
Any amount which is
received against surrendering of his right of ownership for a short period is
called revenue income.
D)
Lump-sum
income
Any amount being
received in installments is called capital income.
And,
Any amount which is
received in lump sum is called revenue income.
7)
Conclusion:
There are different
kinds of income. Income means profit which is chargeable to tax under income
tax ordinance 2001.
