1.4. DISTINCTION BETWEEN CAPITAL AND REVENUE

Introduction
The concepts of capital and revenue are of fundamental importance to the correct determination
of accounting profit for a period and recognition of business assets at the end of that
period. The distinction affects the measurement of profit in a number of accounting periods.
Capital has been defined by economists as those assets which are used in the production of
goods and services for further production of assets. In accounting, on the other hand, the
capital of a business is increased by that portion of the periodic income which has not been
consumed by the owner.
The relationship between capital and revenue is that between a tree and its fruits. It is the tree
which produces the fruits, and it is the fruit that can be consumed. If the tree is tendered with
care, it will produce more fruits, conversely, if the tree is destroyed, there will be no more
fruits. Likewise, revenue comes out of capital and capital is the source of revenue. Capital is
invested by a person in the business so that it may produce revenue. Moreover, as a fruit may
give birth to another new tree, different revenues may also produce further new capital.
Capital can be brought in by a person into the business in different forms-cash or kind. When
capital is brought in the form of cash, it is spent away on various items of assets that make the
business a running concern. Capital of the firm is thus, represented by its inventory of assets.
Capital of a business can be increased in a two fold way:
1. When the owner brings in more capital to the business; and/or
2. When the owner does not consume the entire periodic income.
When the owner brings in further capital to his business, the amount is credited to the Capital
Account.
Likewise, the net income for a period is credited to the Capital Account, and if his drawings
are less than that income, the capital is increased by the difference.
The difference between the two terms ‘revenue’ and ‘receipt’ should be carefully distinguished.
A receipt is the inflow of money into business, whereas revenue is the aggregate exchange
value received for goods and services provided to the customers.