Why is "Recording the full proceeds of selling an asset as sales" a common mistake in Capital & Revenue Income?

Why it happens: Cash comes in, so it feels like income. How to avoid it: Only the PROFIT or LOSS on disposal affects profit; the rest of the proceeds removes the asset (via the disposal account). Source: 9706 Examiner Reports

Why is "Treating a loan received as income" a common mistake in Capital & Revenue Income?

Why it happens: Money received looks like income. How to avoid it: A loan is a LIABILITY (capital receipt), not income. Recording it as sales overstates profit and omits the liability. Source: 9706 Examiner Reports

Why is "Treating capital introduced as income" a common mistake in Capital & Revenue Income?

Why it happens: It increases the bank balance. How to avoid it: Capital introduced increases CAPITAL (owner financing), not profit. Record Dr Bank, Cr Capital. Source: 9706 Examiner Reports

Why is "Treating rent/commission received as a capital receipt" a common mistake in Capital & Revenue Income?

Why it happens: Confusing 'other income' with capital. How to avoid it: Rent, commission, discount and interest received are earned → revenue income → statement of profit or loss. Source: 9706 Examiner Reports

Why is "Ignoring amounts received in advance / accrued when recognising income" a common mistake in Capital & Revenue Income?

Why it happens: Using cash received as the income figure. How to avoid it: Adjust revenue income for amounts received in advance (deduct) and accrued income (add) under the matching concept. Source: 9706 Examiner Reports

Why is "Treating disposal proceeds below carrying value as income" a common mistake in Capital & Revenue Income?

Why it happens: Any sale feels like income. How to avoid it: If proceeds are below carrying value there is a LOSS on disposal (an expense), not income. Source: 9706 Examiner Reports

Cambridge International A Levels Accounting (9706)

Capital & Revenue Income

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Detailed Study Notes

Detailed notes on Capital and Revenue Income and Expenditure for Cambridge International A Levels Accounting, covering key concepts, explanations, examples, and exam-focused revision points.

Capital & Revenue Income — Cambridge AS & A Level Accounting 9706 Study Notes (2026-2028)

The income side of the capital/revenue distinction. Learn to separate revenue income (earned from normal trading) from capital receipts (from financing or selling assets), why only revenue income belongs in the statement of profit or loss, and how misclassifying a receipt distorts profit.

At a glance

Revenue income = earned from normal trading / day-to-day operations → statement of profit or loss.
Capital receipts = from financing or selling non-current assets → statement of financial position (not profit).
Revenue income examples: sales, rent received, commission received, discount received, interest received.
Capital receipt examples: capital introduced by the owner, a loan received, proceeds from selling a non-current asset.
Only revenue income affects profit; capital receipts affect assets, liabilities or capital.
The profit on disposal of an asset (not the whole proceeds) is the part that reaches the statement of profit or loss.
Misclassifying a capital receipt as revenue income overstates profit.

What you’ll learn

Mapped to the Cambridge International A Level 9706 syllabus (2026-2028).

1.3.1 — Understand the difference between the treatment of capital and revenue income.
1.3.1 — Understand the effect on profit/loss and asset value of the incorrect treatment of capital and revenue income.
Link 1.3.2 — proceeds from selling a non-current asset are dealt with through the disposal account.

Revenue income vs capital receipts

Revenue income is earned by trading; capital receipts come from financing or selling assets.

Revenue income is income earned from the normal operations of the business — its benefit relates to the current period. It belongs in the statement of profit or loss.

Examples: sales (revenue), rent received, commission received, discount received, interest received.

Capital receipts are amounts received from non-trading sources — financing the business or disposing of its assets. They do not form part of profit; they appear in the statement of financial position.

Examples: capital introduced by the owner (increases capital), a loan received (increases a liability), and the proceeds of selling a non-current asset (handled via the disposal account).

The test: has the business earned this through its trading activities (revenue income), or has it raised finance / sold an asset (capital receipt)?

Revenue income: earned by normal trading → statement of profit or loss.
Capital receipts: financing or selling assets → statement of financial position.
Sales, rent/commission/discount/interest received = revenue income.
Capital introduced, loans received, asset sale proceeds = capital receipts.

See the full worked example for capital & revenue income →

Selling a non-current asset: only the profit is income

The whole sale proceeds are not income — only the profit (or loss) on disposal reaches profit.

A common trap: when a business sells a non-current asset, the full proceeds are not revenue income. The asset was already on the books; selling it is a capital transaction.

The proceeds are dealt with in a disposal account (1.3.2).
Only the profit on disposal (proceeds > carrying value) is shown as income in the statement of profit or loss; a loss on disposal (proceeds < carrying value) is shown as an expense.
The rest of the proceeds simply removes the asset from the statement of financial position and brings in cash.

Example. A machine with a carrying value of $8,000 is sold for $9,500. The whole $9,500 is not income — only the $1,500 profit on disposal goes to the statement of profit or loss; the $8,000 represents the asset turning into cash.

Selling a non-current asset is a capital transaction.
Only the profit/loss on disposal affects the statement of profit or loss.
The rest of the proceeds removes the asset and brings in cash.
Treating full proceeds as sales income hugely overstates profit.

Effect of misclassifying income

Treating a capital receipt as revenue income overstates profit.

Getting income classification wrong distorts the statements:

Capital receipt treated as revenue income (e.g. recording a loan or asset proceeds as 'sales'): income/profit is overstated, and the liability or asset is misstated.
Revenue income treated as a capital receipt (e.g. recording rent received as capital): income/profit is understated.

Because profit feeds into capital (closing capital = opening + profit − drawings), an overstated profit also overstates capital/net assets, and vice versa.

This is, like the expenditure version, an error of principle — the trial balance still balances, so it would not be detected by the trial balance.

Capital receipt as revenue income → profit overstated.
Revenue income as capital receipt → profit understated.
Profit feeds capital, so net assets are misstated too.
It is an error of principle — the trial balance still balances.

See the full worked example for capital & revenue income →

Quick recap

Revenue income is earned by normal trading → statement of profit or loss.
Capital receipts come from financing or selling assets → statement of financial position.
Sales, rent/commission/discount/interest received = revenue income.
Capital introduced, loans, asset sale proceeds = capital receipts.
Only the profit/loss on disposal of an asset reaches profit, not the full proceeds.
Misclassifying a capital receipt as income overstates profit (an error of principle).

Memorise this

Verbatim phrases and definitions Cambridge mark schemes credit.

Revenue income = earned from trading (sales, rent/commission/interest received) → statement of profit or loss.
Capital receipts = capital introduced, loans, asset sale proceeds → statement of financial position.
On disposal, only the profit/loss reaches profit — not the full proceeds.
Capital receipt as income → profit overstated.

How it’s examined

Tested on Paper 1 and Paper 2 through classification of receipts and the effect of misclassification (2-6 marks, point-based). Examiner reports note candidates recording loan or asset-sale proceeds as sales income, hugely overstating profit.

Sources: Cambridge International AS & A Level Accounting 9706 syllabus (2026-2028); 9706 Paper 2 past papers & mark schemes, 2022-2024; 9706 Examiner Reports, 2022-2024. Last reviewed 2026-06-17.

Take this whole topic with you

Step-by-step worked examples — Capital & Revenue Income

Step-by-step solutions to past-paper-style questions on capital & revenue income, written exactly the way a tutor would explain them at the board.

Question type:

1Classify the receipt (4 marks)
Getting startedIdentify & classify• 9706 Paper 1/2 style• capital, revenue, income, AO1
Question
Classify each as revenue income or a capital receipt: (i) cash sales; (ii) a bank loan received; (iii) rent received from subletting; (iv) the owner paying in additional capital. (4 marks)
Step-by-step solution
1. Step 1
  (i) Cash sales — earned from trading → revenue income.
2. Step 2
  (ii) Bank loan received — financing → capital receipt.
3. Step 3
  (iii) Rent received — earned from an activity → revenue income.
4. Step 4
  (iv) Additional capital — owner financing → capital receipt.
Answer
(i) Revenue; (ii) Capital; (iii) Revenue; (iv) Capital.
Examiner tip
Earned from operations = revenue income; raised as finance = capital receipt.
2Income from selling an asset (5 marks)
Building confidenceMulti-step problem• disposal, AO2
Question
A machine with a carrying value of $7,000 is sold for$ 9,000. State how much, if any, is recorded as income in the statement of profit or loss, and explain why the full $9,000 is not. (5 marks)
Step-by-step solution
1. Step 1
  Profit on disposal = proceeds − carrying value = 9,000 − 7,000 = $2,000.
2. Step 2
  Only the $2,000 profit on disposal is shown as income in the statement of profit or loss.
3. Step 3
  The other $7,000 simply represents the asset turning into cash — it removes the machine from the statement of financial position.
4. Step 4
  Treating the full $9,000 as income would overstate profit by $7,000.
Answer
Only the $2,000 profit on disposal is income; the$ 7,000 removes the asset (not income).
Examiner tip
Selling a non-current asset is a capital transaction; only the profit/loss on disposal affects profit.
3Effect of misclassifying a loan (5 marks)
Building confidenceWord problem• effect, AO2
Question
A business recorded a $30,000 bank loan received as sales income. Explain the effect on the profit for the year and on the statement of financial position. (5 marks)
Step-by-step solution
1. Step 1
  Sales/income is overstated by $30,000, so profit is overstated by $30,000.
2. Step 2
  The loan (a liability) has not been recorded → liabilities understated by $30,000.
3. Step 3
  Overstated profit overstates capital/net assets by $30,000.
4. Step 4
  So the statement of financial position is wrong in two ways: liabilities too low and capital too high.
5. Step 5
  It is an error of principle — the trial balance still balances.
Answer
Profit overstated $30,000; loan (liability) omitted; capital overstated$ 30,000; an error of principle.
Examiner tip
A loan is a liability, not income — recording it as sales overstates profit and omits the liability.
4Classify a list of receipts (6 marks)
StretchIdentify & classify• classification, AO2
Question
Classify each as revenue income (R) or capital receipt (C): (i) commission received; (ii) proceeds from selling an old delivery van; (iii) interest received on a deposit; (iv) a long-term mortgage received; (v) discount received from a supplier; (vi) cash from issuing shares (a company). (6 marks)
Step-by-step solution
1. Step 1
  (i) Commission received → R.
2. Step 2
  (ii) Van proceeds → C (disposal — only the profit/loss is income).
3. Step 3
  (iii) Interest received → R.
4. Step 4
  (iv) Mortgage received → C (financing/liability).
5. Step 5
  (v) Discount received → R (income).
6. Step 6
  (vi) Issuing shares → C (financing/equity).
Answer
(i) R; (ii) C; (iii) R; (iv) C; (v) R; (vi) C.
Examiner tip
Asset proceeds and share/loan finance are capital; amounts earned from activities are revenue income.
5Rent received with timing (5 marks)
StretchMulti-step problem• revenue income, matching, AO2
Question
A business subletting part of its premises received $12,000 rent during the year. At the year end,$ 1,000 had been received in advance (for next year) and $800 was owing to the business (this year, unpaid). Calculate the rent received to be shown as income this year. (5 marks)
Step-by-step solution
1. Step 1
  Rent received is revenue income, recognised in the period it relates to (matching).
2. Step 2
  Start with received $12,000.
3. Step 3
  Deduct $1,000 received in advance (relates to next year).
4. Step 4
  Add $800 accrued income (earned this year, not yet received).
5. Step 5
  Income this year = 12,000 − 1,000 + 800 = $11,800.
Answer
Rent received (income) this year = $11,800.
Examiner tip
Even revenue income is adjusted for amounts received in advance and accrued income (matching).
6Why distinguish income types (5 marks)
StretchWord problem• AO3
Question
Explain why it is important to distinguish revenue income from capital receipts when preparing the financial statements. (5 marks)
Step-by-step solution
1. Step 1
  Only revenue income is part of profit (it is earned from operations).
2. Step 2
  Capital receipts affect assets, liabilities or capital, not profit.
3. Step 3
  Treating a capital receipt as income overstates profit (and misstates the statement of financial position).
4. Step 4
  Since profit feeds capital, net assets are also misstated.
5. Step 5
  Correct classification gives a true and fair view of performance and position.
Answer
Only revenue income affects profit; misclassifying capital receipts overstates profit and misstates the SOFP, breaching the true and fair view.
Examiner tip
Link the distinction to the correct measurement of profit and a true and fair view.
7Combined misclassification (6 marks)
StretchMulti-step problem• effect, AO2
Question
A business recorded $15,000 proceeds from selling a vehicle (carrying value$ 11,000) entirely as sales. Calculate the effect on the reported profit. (6 marks)
Step-by-step solution
1. Step 1
  It recorded $15,000 as sales income.
2. Step 2
  Correctly, only the profit on disposal = 15,000 − 11,000 = $4,000 should be income.
3. Step 3
  So income is overstated by 15,000 − 4,000 = $11,000.
4. Step 4
  Therefore profit is overstated by $11,000.
5. Step 5
  Also, the vehicle (carrying value $11,000) was not removed from non-current assets → assets overstated by $11,000.
6. Step 6
  Net assets are overstated by $11,000 through the inflated profit (and the asset still on the books).
Answer
Profit overstated by $11,000 (only$ 4,000 should be income); the asset was also not removed.
Examiner tip
The error overstates profit by the carrying value; only the disposal profit/loss is income.
8Capital introduced is not income (4 marks)
Building confidenceWord problem• capital receipt, AO2
Question
The owner pays $20,000 of personal savings into the business bank account. Explain why this is not income, and state where it is recorded. (4 marks)
Step-by-step solution
1. Step 1
  The $20,000 has not been earned through trading — it is the owner financing the business.
2. Step 2
  So it is a capital receipt, not revenue income, and does not affect profit.
3. Step 3
  It is recorded as Dr Bank, Cr Capital — increasing capital in the statement of financial position.
Answer
Not earned by trading → a capital receipt; recorded Dr Bank, Cr Capital (not income).
Examiner tip
Capital introduced increases capital, not profit; recording it as income would overstate profit.
9Sundry income classification (6 marks)
StretchIdentify & classify• classification, AO2
Question
A trading business has these receipts. Classify each and state where it is shown: (i) sale of inventory $40,000; (ii) sale of an old computer (carrying value$ 300) for $250; (iii) bank interest received$ 120; (iv) capital introduced $5,000. (6 marks)
Step-by-step solution
1. Step 1
  (i) Sale of inventory → revenue income (sales) → statement of profit or loss $40,000.
2. Step 2
  (ii) Sale of computer for $250 (carrying value $300) → a loss on disposal of $50 → an expense in the statement of profit or loss (not $250 income).
3. Step 3
  (iii) Interest received → revenue income $120 → statement of profit or loss.
4. Step 4
  (iv) Capital introduced → capital receipt $5,000 → statement of financial position (capital).
Answer
(i) Sales income $40,000; (ii) loss on disposal$ 50 (expense); (iii) interest income $120; (iv) capital$ 5,000 (SOFP).
Examiner tip
Note (ii): proceeds below carrying value give a LOSS on disposal (an expense), not income.
10Inflating profit via income (6 marks)
StretchWord problem• AO3, ethics
Question
An owner suggests recording a $25,000 loan received and$ 18,000 proceeds from selling a machine (carrying value $16,000) all as sales, to make the business look more profitable for a loan application. Discuss whether this is acceptable. (6 marks)
Step-by-step solution
1. Step 1
  The loan $25,000 is a capital receipt (liability) — not income.
2. Step 2
  Of the machine proceeds, only the $2,000 profit on disposal is income; $16,000 is the asset turning into cash.
3. Step 3
  Recording all $43,000 as sales would overstate profit by $41,000 (43,000 − 2,000).
4. Step 4
  This breaches the realisation/matching concepts and prudence, and omits the loan liability.
5. Step 5
  It would mislead the lender — dishonest and unethical (links to 3.2).
6. Step 6
  Conclusion: not acceptable; income must reflect amounts genuinely earned from trading, giving a true and fair view.
Answer
Not acceptable — overstates profit by ~$41,000, omits the loan liability, breaches realisation/prudence and is unethical; income must be genuinely earned.
Examiner tip
Quantify the overstatement and bring in the ethical dimension of misleading a lender for full marks.

Model Answers — Capital & Revenue Income

High-scoring sample answers for capital & revenue income on the Cambridge IGCSE paper, with examiner-style notes mapping each response to the mark scheme and assessment objectives.

Question 1
9706 Paper 2 style2 marks
Q (2 marks). Distinguish between revenue income and a capital receipt.
Model answer
Revenue income is income earned from the normal trading activities of the business (e.g. sales, rent received) and is shown in the statement of profit or loss. A capital receipt is money received from financing the business or selling a non-current asset (e.g. a loan, capital introduced, asset proceeds) and is shown in the statement of financial position.
Why this scores
Marking (point-based, 2). 1 mark for revenue income (earned/trading → profit), 1 for capital receipt (financing/asset sale → SOFP).
Question 2
9706 Paper 2 style4 marks
Q (4 marks). Classify each as revenue income or a capital receipt: (a) commission received; (b) proceeds from selling surplus machinery; (c) a bank loan received; (d) interest received on a savings account.
Model answer
(a) Revenue income (earned). (b) Capital receipt (asset disposal). (c) Capital receipt (financing/liability). (d) Revenue income (earned).
Why this scores
Marking (point-based, 4). 1 mark each. Earned amounts are revenue income; financing and asset sales are capital receipts.
Question 3
9706 Paper 2 style5 marks
Q (5 marks). A business sold a machine for $14,000. Its carrying value was$ 11,500. State the amount shown as income in the statement of profit or loss, and explain why the full $14,000 is not recorded as income.
Model answer
Profit on disposal = proceeds − carrying value = 14,000 − 11,500 = $2,500. Only this $2,500 is shown as income in the statement of profit or loss.

The full $14,000 is not income because the machine was already recorded as an asset; selling it is a capital transaction. Of the proceeds, $11,500 simply represents the asset turning into cash (removing it from the statement of financial position). Recording the whole $14,000 as income would overstate profit by $11,500.
Why this scores
Marking (point-based, 5). Profit on disposal $2,500 (2); explanation that the rest removes the asset / capital transaction (2); recognising the overstatement risk (1).
Question 4
9706 Paper 2 style5 marks
Q (5 marks). A business received $9,600 rent from a tenant during the year. At the year end,$ 800 had been received in advance and $500 of rent was still owing to the business. Calculate the rent received to be shown in the statement of profit or loss.
Model answer
Rent received (income) = received − received in advance + accrued income

= 9,600 − 800 + 500

= $9,300.

(The $800 received in advance relates to next year and is a current liability; the $500 accrued income is owed to the business and is a current asset.)
Why this scores
Marking (point-based, 5). Method (1); deduct received in advance (1); add accrued income (1); answer $9,300 (1); identify advance as liability / accrued as asset (1).
Question 5
9706 Paper 2/3 style6 marks
Q (6 marks). A business recorded a $40,000 long-term bank loan received as sales income. Explain the effect of this error on (a) the profit for the year and (b) the statement of financial position.
Model answer
(a) Profit. Recording the loan as sales overstated income by $40,000, so the profit for the year is overstated by $40,000. The loan is not income — it has not been earned through trading.

(b) Statement of financial position.

The loan (a non-current liability) has been omitted, so liabilities are understated by $40,000.

The overstated profit flows into capital, so capital is overstated by $40,000.

The statement of financial position still balances (the missing $40,000 liability is offset by the $40,000 too much capital), which is why this error of principle is not revealed by the trial balance — but both figures are wrong.
Why this scores
Marking (point-based, 6). Profit overstated $40,000 (2); liability omitted/understated (2); capital overstated (1); error of principle / TB still balances (1).
Question 6
9706 Paper 2/3 style6 marks
Q (6 marks). A business recorded the $22,000 proceeds from selling a delivery vehicle (carrying value$ 17,000) entirely as sales. Calculate the effect on the reported profit and explain the effect on the non-current assets.
Model answer
Profit. Only the profit on disposal = 22,000 − 17,000 = $5,000 should be income. By recording the full $22,000 as sales, income was overstated by 22,000 − 5,000 = $17,000, so profit is overstated by $17,000.

Non-current assets. The vehicle (carrying value $17,000) was not removed from the books, so non-current assets are overstated by $17,000. (The asset should have been transferred to a disposal account and removed.)
Why this scores
Marking (point-based, 6). Profit on disposal $5,000 (2); profit overstated$ 17,000 (2); non-current assets overstated $17,000 (2). The overstatement equals the carrying value.
Question 7
9706 Paper 2 style6 marks
Q (6 marks). State whether each is revenue income or a capital receipt and where it is shown: (a) proceeds of $600 from selling an old printer (carrying value$ 400); (b) $50,000 from a 5-year bank loan; (c)$ 250 discount received from a supplier.
Model answer
(a) Printer sale. A capital transaction: only the profit on disposal of 600 − 400 = $200 is income (statement of profit or loss); the $400 removes the asset. (Not revenue income on the full $600.)

(b) Bank loan $50,000. A capital receipt — a non-current liability in the statement of financial position; not income.

(c) Discount received $250. Revenue income — shown in the statement of profit or loss.
Why this scores
Marking (point-based, 6). (a) only $200 profit on disposal is income (2); (b) loan = liability, not income (2); (c) discount received = revenue income (2).
Question 8
9706 Paper 2 style4 marks
Q (4 marks). Explain why distinguishing revenue income from capital receipts is necessary to measure profit correctly.
Model answer
Profit is measured as revenue income less expenses for the period. Only income earned from operations (revenue income) should be included.

Capital receipts — such as loans, capital introduced and asset sale proceeds — are not earned from trading; they change assets, liabilities or capital, not profit. Including them as income would overstate profit and misstate the statement of financial position, so they must be kept separate for profit to be measured correctly.
Why this scores
Marking (point-based, 4). Profit = revenue income − expenses (~1); capital receipts not earned, affect SOFP not profit (~2); including them overstates profit (~1).
Question 9
9706 Paper 2 style3 marks
Q (3 marks). The owner pays $15,000 of personal money into the business. State whether this is income, give the double entry, and state where it appears.
Model answer
It is not income — it is capital introduced (a capital receipt). Double entry: Dr Bank $15,000; Cr Capital $15,000. It increases capital in the statement of financial position.
Why this scores
Marking (point-based, 3). Not income (1); Dr Bank / Cr Capital (1); shown in SOFP as capital (1).
Question 10
9706 Paper 3 evaluation style6 marks
Q (6 marks). To strengthen a loan application, the owner of a business proposes recording a $35,000 loan received and the$ 20,000 proceeds of selling a machine (carrying value $18,000) all as sales income. Discuss whether this should be done.
Model answer
Why the owner wants it. Recording these as sales would make profit appear much higher, strengthening the loan application.

Why it is wrong.

The loan $35,000 is a capital receipt (liability), not income.

Of the machine proceeds, only the profit on disposal = 20,000 − 18,000 = $2,000 is income; the $18,000 represents the asset becoming cash.

Recording all $55,000 as sales would overstate profit by $53,000 and omit the loan liability, breaching realisation, matching and prudence.

It would mislead the lender, which is dishonest and unethical (links to the fundamental principle of integrity, 3.2).

Conclusion. This must not be done. Income must reflect only amounts genuinely earned from trading; the financial statements must give a true and fair view, and deliberately misleading a lender could have serious legal and reputational consequences.
Why this scores
Marking (point-based, ~6). Identify loan as liability + only $2,000 disposal profit (~2); quantify overstatement ~$ 53,000 (~1); concepts breached (~1); ethical dimension (~1); supported conclusion (~1).

Key Definitions and Keywords — Capital & Revenue Income

Definitions to memorise and the exact keywords mark schemes credit for capital & revenue income answers — sharpened from recent examiner reports for the 2026 Cambridge IGCSE sitting.

Revenue income
Examiner keyword
Income earned from the normal trading and operating activities of the business; shown in the statement of profit or loss.
Capital receipt
Examiner keyword
Money received from financing the business or selling a non-current asset; shown in the statement of financial position, not as profit.
Sales (revenue)
Examiner keyword
Income from selling goods or services in the normal course of trade — the main item of revenue income.
Profit/loss on disposal
Examiner keyword
The difference between the proceeds of selling a non-current asset and its carrying value; the only part of a disposal that affects profit.
Capital introduced
Funds or assets put into the business by the owner; a capital receipt that increases capital, not income.
Loan received
Money borrowed by the business; a capital receipt that increases a liability, not income.
Sundry / other income
Revenue income other than sales — e.g. rent received, commission received, discount received, interest received.
Error of principle (link)
Examiner keyword
Misclassifying a capital receipt as revenue income (or vice versa) is an error of principle; the trial balance still balances.

Common Mistakes and Misconceptions — Capital & Revenue Income

The traps other students keep falling into on capital & revenue income questions — taken from recent Cambridge IGCSE examiner reports and mark schemes — and how to avoid them.

✕Recording the full proceeds of selling an asset as sales
9706 Examiner Reports
Why it happens
Cash comes in, so it feels like income.
How to avoid it
Only the PROFIT or LOSS on disposal affects profit; the rest of the proceeds removes the asset (via the disposal account).
✕Treating a loan received as income
9706 Examiner Reports
Why it happens
Money received looks like income.
How to avoid it
A loan is a LIABILITY (capital receipt), not income. Recording it as sales overstates profit and omits the liability.
✕Treating capital introduced as income
9706 Examiner Reports
Why it happens
It increases the bank balance.
How to avoid it
Capital introduced increases CAPITAL (owner financing), not profit. Record Dr Bank, Cr Capital.
✕Treating rent/commission received as a capital receipt
9706 Examiner Reports
Why it happens
Confusing 'other income' with capital.
How to avoid it
Rent, commission, discount and interest received are earned → revenue income → statement of profit or loss.
✕Ignoring amounts received in advance / accrued when recognising income
9706 Examiner Reports
Why it happens
Using cash received as the income figure.
How to avoid it
Adjust revenue income for amounts received in advance (deduct) and accrued income (add) under the matching concept.
✕Treating disposal proceeds below carrying value as income
9706 Examiner Reports
Why it happens
Any sale feels like income.
How to avoid it
If proceeds are below carrying value there is a LOSS on disposal (an expense), not income.

Capital & Revenue Income

Detailed Study Notes

At a glance

What you’ll learn

Quick recap

Memorise this

How it’s examined

Take this whole topic with you

1Classify the receipt (4 marks)

2Income from selling an asset (5 marks)

3Effect of misclassifying a loan (5 marks)

4Classify a list of receipts (6 marks)

5Rent received with timing (5 marks)

6Why distinguish income types (5 marks)

7Combined misclassification (6 marks)

8Capital introduced is not income (4 marks)

9Sundry income classification (6 marks)

10Inflating profit via income (6 marks)

Revenue income

Capital receipt

Sales (revenue)

Profit/loss on disposal

Capital introduced

Loan received

Sundry / other income

Error of principle (link)

✕Recording the full proceeds of selling an asset as sales

✕Treating a loan received as income

✕Treating capital introduced as income

✕Treating rent/commission received as a capital receipt

✕Ignoring amounts received in advance / accrued when recognising income

✕Treating disposal proceeds below carrying value as income