Difference Between Capital Receipts and Revenue Receipts

Before understanding the concept of capital receipts and revenue receipts, let's start with understanding what receipts are. Receipts are a written record or recognition that a sum of money was paid in exchange for goods or services. Sellers of goods or service providers issue receipts in exchange for the customer's payment. The receipts must necessarily be supplied in business-to-consumer (B2C) and business-to-business (B2B) transactions.

Did you know?

Thermal printing is the most frequent type of physical receipt printing since it is inexpensive and simple. 

What Are Capital Receipts? 

Capital receipts are payments received by a company that are not income in nature and enhance the company's overall capital. These are funds generated by a company's non-operating operations and appear on the balance sheet rather than the income statement.

They are non-recurring, meaning they do not occur regularly and cannot be used for profit distribution. Unlike revenue receipts, which can be used to fund reserves, capital receipts are not utilised to fund reserves. They end up increasing a company's obligations or decreasing its assets. These types of receipts have no impact on an organization's total profit or loss and are recorded on an accrual basis, which means they are recorded as soon as the right of receipt is established.

Also Read: What are the Types of Accounts in Accounting?

Basic Conditions for Capital Receipts

Capital receipts must mandatorily satisfy the following conditions: 

• Create a Liability: If your company obtains a loan from a bank or other financial institution, a liability would be created. As a result, it is a capital receipt. However, if your company received a commission for applying its knowledge to build a unique kind of product for another business, that wouldn't be considered a capital receipt because no liability was created.
• Reduce Company Assets: The asset would be reduced if your company sold all of its shares to the public, which would lead to increased revenue in the future. You would consider it as a capital receipt in this situation.

 Types of Capital Receipts

• Borrowings:- Borrowings involve money raised from outside sources to cover the company's expenses. Because it creates responsibility for the corporation, it is classified as a capital receipt.
• Loan Recoveries:- Sometimes, the corporation separates a portion of an asset to collect future loans, reducing the company's assets.
• Other Capital Receipts:- "Other capital receipts" also includes disinvestment and modest savings. Disinvestment is the act of selling off a portion of a company. It lessens your company's assets. Small savings generate liability for the company; thus, they are regarded as capital receipts.

Capital Receipts Examples

• Cash received from the sale of fixed assets:- The Cash or Cash equivalent from fixed tangible and intangible assets.
• Amount received from Shareholders and debenture holders
• Borrowings include loans, disinvestment, insurance claims, etc.:- These loans create liability for the company. These loans are non-recurring in nature. 

Characteristics of Capital Receipts

• Capital revenues are one-time events.
• Capital receipts produce funds for non-operating activities.
• It either increases the responsibility or decreases the asset.
• It makes no difference to the income statement.

Also Read: What is Double Entry System of Accounting

What are Revenue Receipts? 

Revenue receipts are funds a company receives due to its primary business operations. It leads to an increase in the company's total revenue. Because a company's operating activities create these funds, they are recorded in the trade and profit and loss account rather than the balance sheet. They are recurrent and can be seen frequently and used for profit distribution. 

Basic Conditions to be Met

The following conditions must be satisfied by revenue receipts:

• No Liability Creation: Revenue receipts do not create any liability for the government. For example, taxes received by the government, unlike borrowings, do not create liabilities.
• No Asset Reduction: Revenue receipts do not affect the government's assets. As a result, the government cannot disclose revenue inflows from the sale of a stake in a public-sector venture because the stake sale resulted in asset reduction.

Revenue Receipts Examples

Some instances of revenue receipts in an organisation are:

• Money received for services provided to customers
• Rent received
• Discounts received from suppliers, vendors, or creditors
• Dividend received
• Interest earned
• Commission received
• Bad-debts recovered
• Revenue earned by the sale of scrap material or waste, etc.

Characteristics of Revenue Receipts

• Benefits from revenue receipts are available for a limited time, such as one accounting or financial year.
• Revenue receipts provide benefits for a limited time; another trait is that they are recurring in nature.
• Revenue is generated directly from a company's operational activity.
• It has a direct impact on a company's profit and loss. When a corporation receives income, it either increases its profit or contributes to its loss.
• Disclosure occurs in the trading and profit or loss account rather than the balance sheet.

• Short-term money obtained: Revenue receipts are money received for a brief time. Revenue receipts are only advantageous for one accounting year and never longer.
• Revenue receipts must be recurrent since they provide advantages for only a brief time. The firm wouldn't be able to last very long without recurring revenue.
• Impacts the business's profit or loss: Getting paid directly impacts the company's profit or loss. When the money is received, the profit or the loss changes.

Also Read: What is an Accounting Transaction? Example & Types of Accounting Transaction

Differences Between Capital Receipts and Revenue Receipts

Conclusion:

Capital receipts can lower financial assets or produce liabilities. Both non-debt and debt receipts may be included in this list. Capital receipts include money obtained through the sale of fixed assets, the sum borrowed from a bank, and capital contributed to the company by a new partner. Revenue receipts are funds a company receives due to its primary business operations.

You will be able to manage your daily operations much more successfully if you comprehend these two principles, when they occur, and how they affect your organisation. Your capital receipts will reflect this, for instance, if your company is expanding quickly and has to borrow money through a bank loan or an initial public offering (IPO). If the frequency and volume of your revenue receipts are low, you will know to consider borrowing money instead and, where practical, reducing costs.

Understanding the ideas of capital & revenue receipts, aids investors in making wise decisions regarding whether or not to invest in a firm. You should think hard before investing if a company has more capital receipts than income. Additionally, you can accept the risk if the company has more revenue receipts and fewer capital receptions (occurrence, not volume), as this indicates that it has moved past the point of survival.
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