In one of our previous blogs we have discussed about Capital Expenditure and Revenue expenditure. Let us now understand Capital Receipts and Revenue Receipts.
Capital Receipts:
Capital receipts are the income received by the company which is non-recurring in nature. They are part of the financing and investing activities rather than operating activities. The capital receipts either reduces an asset or increases a liability. The receipts can be generated from the following sources:
- Issue of Shares
- The issue of debt instruments such as debentures.
- Loan taken from a bank or financial institution.
- Government grants.
- Insurance Claim.
- Additional capital introduced by the proprietor.
- Sale of investment
- Sale of plant and machinery
Revenue Receipts:
Revenue Receipts are the major source of income of the enterprise, without which a business may not survive for a long time.
Definition of Revenue Receipt: Revenue Receipts are the receipts which arise through the core business activities. These receipts are a part of normal business operations that is why they occur again and again however its benefit can be enjoyed only in the current accounting year as its effect is short term. The income received from the day to day activities of business includes all the operations that bring cash into the business like:
- Revenue generated from the sale of inventory
- Services Rendered
- Discount Received from the creditors or suppliers
- Sale of waste material/scrap
- Interest Received
- Receipt in the form of dividend
- Rent Received
- Commission received
Key Differences Between Capital Receipt and Revenue Receipt:
- Receipts generated from investing and financing activities are capital receipts, on the other hand, receipts from operating activities are revenue receipt.
- Capital Receipts do not frequently occur, as it is non-recurring and irregular. But, revenue receipts do not occur again and again they are recurring and regular.
- The benefit of capital receipt can be enjoyed in more than one year, but the benefit of revenue receipt can be enjoyed only in the current year.
- Capital Receipts appears on the liabilities side of the Balance Sheet whereas Revenue Receipts appears on the credit side of the Profit and Loss Account as income for the financial year.
- The capital receipt is received in exchange for the source of income. Unlike revenue received which is a substitution of income.
- Capital receipt either decreases the value of an asset or increases the value of liability, but revenue receipt neither increases nor decreases the value of asset or liability.
Purpose of raising Capital Receipts:
Capital Receipts are raised by an organization for the following purposes:
- One of the most important purpose of raising capital receipts is to meet capital expenditure (CAPEX) requirements of the business. This is particularly important for a capital intensive business unit.
- A business organization may also raise capital receipts to pay off existing debts. Issuing shares to repay the amount of debentures is one such example.
- A business organization may also raise capital receipts to create a reserve to meet future capex requirements.
Treatment of Capital Receipts in the books of Accounts:
Any capital receipt would affect Balance Sheet of the business. A capital receipt may affect only one or both sides of the balance sheet i.e. Asset and Liability side.
- Capital Receipts which affect only Asset Side: In case where capital receipts arise from sale of an asset, it would affect only asset side of the balance sheet. In such cases, Bank or cash account is debited while the asset account is credited.
- Capital Receipts which affect both Sides: In case where a company issues shares or debentures, the bank or cash account is debited while the equity or debentures account is credited.