Receipts are the earning of the company and through it revenue is generated. Not all the receipts contribute towards the profit and loss in business. Receipts can be categorized as
- Revenue receipts and
- Capital receipts.
To some extent, we can say that revenue receipts affect the profit and loss of the business and capital receipts don’t.
For a better understanding of the revenue receipts and capital receipts let’s discuss these terms in detail.
What do you understand by Revenue Receipts?
Revenue receipts are money earned by a business through its day to day operational activities. These are recurring in nature and directly affects the profit and loss of the business. Thus, the disclosure of revenue receipts are required to be made in the income statement of the company or organization.
In general terms, we can say that revenue receipts do not create any liability for the business nor does it reduces the assets. It simply suggests that goods or services have been delivered to the clients and in return, income has been received. Ultimately it is a source of cash inflow which leads to an increase in the total revenue of a company.
Examples of Revenue Receipts
Some examples of receipts which are of routine nature i.e. revenue receipts in an organization are,
- Money received for services provided to customers
- Rent received
- Discount received from suppliers, vendors or creditors
- Dividend received
- Interest earned
- Commission received
- Bad-debts recovered(if any)
- Revenue earned by the sale of scrap material or waste etc
Some Important features of Revenue Receipts-
- Benefits from revenue receipts can be taken for a short period of time i.e one accounting or financial year
- As benefits from revenue receipts are for a short period of time, thus another feature comes that it is recurring in nature
- Revenue receipts come directly from the operational activities of a business
- It directly affects the profit and loss of business. As when revenue is received by a company it will either increase the profit or will contribute towards loss.
- Disclosure is made under Trading and Profit or Loss account and not in the Balance Sheet.
What do you understand by Capital Receipts?
Capital receipts are cash inflow in business arising from financial (capital) activities and not the operating activities of the business. These are receipts resulting from activities which are occasional or not of routine nature. Capital Receipts are not the regular or main source of income for an organisation. Thus it either creates a liability or reduces the assets for the business entity. And, because of its capital nature such receipts are shown in the balance sheet of a company and not the income statement or Profit and Loss account.
These receipts are recorded on an accrual basis (means recording an income for which you have got the rights to receive but the actual receipt has not yet occurred). Also, since capital receipts are non-recurring in nature, they can not be used for the distribution of profit, unlike revenue receipts.
Types of Capital Receipts
Capital receipts are divided into three groups-
- Recovery of Loans and
- Other Capital Receipts
It includes the funds raised from outside to meet the expenditure incurred in the company. It is considered as the capital receipts because it creates liability for the company.
2) Recovery of Loans
Sometimes the company separates a part of the asset to recover the loans in future, as a result, it decreases the assets of the company.
3) Other Capital Receipts
Under this category of Capital Receipts, Disinvestment and Small Savings are covered.
Examples of Capital Receipts
- Cash received from the sale of fixed assets
- Amount received from Shareholders and debenture holders
- Borrowings which includes loans, disinvestment, insurance claims etc.
Features of Capital Receipts
- Capital receipts are non-recurring in nature
- Funds generated from capital receipts are from non-operating activities.
- It either creates a liability or reduces the asset.
- It has no impact on the income statement instead balance sheet is affected by the capital receipts.
Difference between the Revenue Receipts & Capital Receipts
|S.No.||Revenue Receipts||Capital Receipts|
|1.||Revenue receipts are generated from the operational activities of the business.||Capita receipts are generated from the financial activities.|
|2.||It affects the profit and loss of the business.||It has no impact on the profit and loss of a business.|
|3.||Revenue receipts are recurring in nature.||Capital receipts are non-recurring in nature.|
|4.||It is the amount received from the sale of normal day to day products or services of the company||Capital receipts result from any loan, disinvestment, insurance claim etc.|
|5.||Affect the Income Statement of the company.||Capital receipts affect the Balance sheet.|
|6.||Through revenue receipts distribution of profit is done.||Profit distribution is not available through capital receipts.|
|7.||It includes Sale of products of business||It includes the sale of fixed or financial assets.|
|8.||Revenue receipts are one of the sources for creating reserves||Capital receipts can not be used for creating reserve funds in the business.|
What do you understand by Revenue and Capital expenditure?
Revenue expenditure is short term in nature and it includes normal day to day expenditure that takes place during the operational activities of a business and expenses that are incurred during the repair and maintenance cost of a revenue-generating assets. These are recurring in nature as it covers all the expenses related to repainting, renewal and regular maintenance of the fixed assets which is being used for generating revenues.
Examples of revenue expenditures are-
Amount spent on-
- Sale of a product
- General and administrative expenses
- Repairs and maintenance etc
On the other hand, Capital expenditure is incurred to avail the long term(more than 1 year) assets in the business. In general, we can say capital expenditures are for fixed assets that impact the productivity in the long run. As it is for the long run, so it is charged gradually through the depreciation method.
Examples of capital expenditures are-
Amount spent to acquire-
- Fixtures etc
The main purpose of incurring the capital expenditure is to increase the income generating ability of a company .
Therefore, we can say that main purpose of incurring capital expenditure is to increase the ability of a company and generate earnings whereas revenue expenditure covers operational and maintenance cost of running the business, which is needed to retain the asset in working manner.