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According to FA2 Textbook, Capital income is net of cost of sale. So, if business purchases a land costing 100,000 and sell it at 150,000. The capital income should be 50,000 because we should deduct the amount of cost of sale to arrive at capital income according to above definition ,but sir you told me the capital income is 150,000 and 50,000 is gain. So, I don’t know which one is right . Your help is appreciated.
The question in the book was what is profit on the sale of an office building?
The answer was capital income. But you told me in previous forum that the profit on sale of a non current asset or the difference between sale and cost of sale is gain. The answer should be gain, not capital income.I don’t know which book you are using, but my FA2 Kaplan book says: Capital income is the proceeds from of sale of nontrading assets (ie proceeds from the sale of non-current assets). The profits of losses from the sale of non-current assets are included in the income statement of a business…
In their AAT notes Kaplan says “Capital income = Income received from the sale
of non-current assets.Example: The proceeds received from selling a motor vehicle.
The problem is what is means by ‘income’. International Accounting Standard 1 contains the following:
Profit or loss is defined as “the total of income less expenses…”.
So there, income is just sales revenue and to get profits you have to deduct costs.
However, further down it states:
Total comprehensive income is defined as “the change in equity during a period resulting from transactions and other events, other than those changes resulting from transactions with owners in their capacity as owners”.
in other words, in simple cases total comprehensive income = net profits ie revenue less costs because if no capital is introduced or taken out by the owners the change in equity is caused by profit/loss.
So, income is used in two senses within a few lines of the standard uses ‘income’ in two ways: sales or sales less costs.
On the face of the income statement ”Capital income” could be used to mean Sales proceeds – NBV of the asset.
Ok sir. The same definition is in my book.
(Capital income is proceeds from sale of nontrading assets (ie proceeds from the sale of non-current assets).Just make these 3 points clear for me.
1. Does the word (proceeds) mean the profit on Sale of non-current asset or total income received from non-current assets?
2. If it means total income, then why profit on the sale of an office building is capital income according to FA2 book? The whole amount received from sale of office building should be capital income, not just profit.
3. If it means profit on sale of non current asset. Then, you told me in previous form that total income received from sale of non-current assets is capital income,not just profit.
Thank you Sir!
1 Proceeds = amount received
2 Agreed, but the meaning of income is not quite fixed.
3 Total amount received = income, per the Kaplan Book, but in the financial statements the term ‘capital income’ can take on another meaning so that it represents the profit.
Very confusing. I don’t think there is any logical explanation. If you see the term ‘capital income’ assume it probably means “profit”. If you see the term “income”, it probably means amount received
Drove me crazy!
What shall I do If I face a question like:
A business buys a machinery at 10,000 and sells it at 25,000. what is the amount of capital income?
A. 15,000
B. 25,000
C. 10,000
D. NoneIf the amount received from sale of non-current assets is capital income, the correct answer is B.
If capital income represents profit on Sale of non-current assets, then the correct answer is A.
Now which concept should I keep in mind?
Profit on the sale of non-current assets is capital income.
Or
Proceeds from sale of non-current assets is capital income
Or
Both.
Very confusing!
It is illogical if I assume the capital income is profit on the sale of non-current assets cause it will be against the definition given in FA2 Textbook. The definition says the whole amount received is regarded as capital income.
Another question that came up in mind:
Where does the profit on the sale of non-current assets appear statement of profit or loss or statement financial position?
You help me a lot Sir!
Probably best to assume that the preferred answer for capital income is 15,000 ie the profit.
It will appear after Operating income on the statement of P&L
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