Explain the difference between capital and revenue items
of expenditure and income P2
Capital income is the money invested by owners or investors that fund the setting up of a business. The source of capital income is influenced by the type of business. Sole trader is a business which is owned individually, meaning their capital income comes from their own money (savings) or personal loans. Partnership is when between two and twenty people join to form a business as partners. Each partner should be the source of capital income. Partners of the business share the profit and decisions that need to be made regarding the business. Limited companies get capital income depending on whether they are public or private limited companies. Public limited companies sell their shares on the stock exchange meaning they receive money quickly to get the business running. Private limited companies are businesses which owners are usually family or friend based and their shares cannot be sold on the stock exchange. The money for capital income is invested by the shareholders. Money for capital income can come from external sources instead of a shareholder investing money. Mortgage is an external source of finance. Mortgage is a long term lending of a high amount of money. A mortgage is usually used to help buy a property which is then paid back over a long period of time, 20 plus years. The advantages of a business using a mortgage are that they can receive huge amounts of money which aren’t entirely paid back for a long time. The disadvantages of a business taking a mortgage out are that if repayments aren’t made then the lender takes ownership on the property, land or whatever the mortgage was used to buy. Another disadvantage of mortgages is that the interest rates are very high compared to loans. The interest rates are dependent on how much borrowed, how much deposited, period of time paid back across and what type of buyer the business is. Loan is another...
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