Question

why is the distinction between capital and revenue items important

Answer 1

Answer -

The Going Concern Assumption allows the analyst to classify the expenditure as capital receipts, capital revenues, Capital Expenditures and Revenue Expenditures. This distinction between capital and revenue nature of the items is important to find out the correct profit or loss during the year and also to ascertain the true and fair position of the business.

Revenue usually drives current earnings and profits whereas capital typically represents the accumulation of prior earnings and profits.

Capital outlines the current book value of the business. Revenue describes a portion of the earnings potential and market value of the business.