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Unit 5 P2 – Explain the difference between capital and revenue items of expenditure and income
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Unit 5 P2 – Explain the difference between capital and revenue items of expenditure and income
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Unit 5 – Business accountingPass criteria 2
P2 – Explain the difference between capital and revenue items of expenditure and
income
Capital income
Capital income (also known as capital gains) is the money that is used by the owners of a
company to set up a business. For example, a sole trader would have to come up with their
own capital income from personal sources to invest into starting up their business. Another
example is when a company is created all of it shareholders must invest some of their own
money (capital income) to start up the company. If a company isn’t doing so well and is not
making enough income from revenue, then shareholders/owners of a company may decide
to put in more money (capital income) to give the company a boost to hopefully make them
succeed in the future. Anyone starting up a business will be able to take out a mortgage to
buy premises for their business which is like a loan but is usually a much larger sum of
money.
Revenue income
Revenue income is money that comes into the business from selling goods/providing a
service. Generally, the money that comes into a business is from sales, rent or commission.
Sales – money coming from selling of goods or a service. For example, Tesco earns money
from the sales of groceries, electronic goods, etc. Tesco also earns money from providing a
delivery service.
Rent received – When a business owns a property and they charge for someone else to use
it, the amount of money they get is called rent. For example, an estate agent can own many
properties and they rent them out to people to live in (the money that is paid by the people
that are renting the properties is an estate agents main source of revenue income).
Commission received – Businesses can sell products/services for other businesses and they
earn money from each sale they make, this money they make is called commission. For
example, Just Eat (online takeaway service) sells takeaways online for other business
(mainly Chinese and Asian takeaways) and charges the restaurants 12% i for each sale they
make for them.
Capital expenditure
Capital expenditure is spending money to gain capital items; fixed assets and intangible
items. Fixed assets are items owned by the business that should stay in the business for a
long time. An example of a business buying fixed assets is a building company buying vans
and tools for its workers. Intangible items are items that are not are physical items but
instead an item that has value for another reason, an example of an intangible item is a
business buying an internet domain to use for a business website.
Revenue expenditure
Revenue expenditure, unlike capital expenditure, is money spent for day-to-day items by a
business. The most common types of revenue expenditure are
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