An Introduction
Both capital and revenue receipts are very important parts of accounts. There is a vivid difference between capital receipt and revenue receipt. Capital receipts are those that do not have a recurrent nature and do not have a tendency of occurring again and again. They only occur once in the final accounting year and are specifically mentioned in the liability corner on a balance sheet. Whereas, revenue receipts are a part of the common and normal operations of the businesses and so they occur continuously.
Capital Receipt
Capital receipt has a nature of occurring again and again in the balance sheet. The capital receipt is a cash-flow receipt and is situated in the liability portion of the balance sheet. It gradually leads to the formation of all the liabilities that can be useful in the future and can be curated well. The decrement of such assets eventually takes place in the future.
Between capital and revenue receipts, the former is always free from taxation unless there is a provision related to it that leads to tax. The capital receipt is a non-routine receipt that eventually becomes load and causes vivid depletion related to the asset of the organization or business. All types of capital receipts are the cash that is received from the sale of a fixed asset.
Revenue Receipts Meaning
Revenue receipts are those receipts that are very important for any business or organization and without their presence, a business fails to survive for a longer period. All the incomes that are received from periodic and daily activities include certain operations that include cash in the business:
Sale of any inventory
Incomes from the services that are rendered.
Discounts that are received from several suppliers.
Interest received
Rent received
Hence, revenue receipts tell us that they have a long-lasting effect on the income of the company.
Difference between Revenue Receipt and Capital Receipt
There is a possibility of two types of receipt occurring in a business or an organization. Both revenue and capital receipt differ from each other where the former is responsible for profit and loss in a company and the latter remains against the expenses.
Difference between Capital and Revenue Receipt
Distinguish between capital receipt and revenue receipt is done based on the following factors:
Meaning –
Capital receipts are those receipts that are produced from the financing activities and the investment of a business.
Revenue receipts are that income that is generated from operating activities of a business
Nature –
The capital receipts are non-recurring.
The revenue receipts are recurring in nature.
Term –
Capital receipts are of long term
Revenue receipts are of short term
Non-Debt Capital Receipt
These are the receipts that are received from the government so that a company can sell its old assets. They are not treated as liabilities.
Tips to Study Accountancy
Accountancy has been considered as the most difficult of the CBSE class 12 commerce curriculum's key subjects. A thorough understanding of the topic is also required to become a chartered accountant, which most commerce students want to be. To prepare for your accountancy test, we'll walk you through some clever study tips you can trust.
Prioritise the Topics: The question paper gives a 60% weighting to questions about company accounts, cash flow statements, and partnerships. While learning, pay special attention to these issues. Also, don't forget the ratio analysis illustrations.
Refer to the Right Books: Your first requirement is the NCERT textbook for CBSE class 12 Accountancy. However, it is insufficient. Double Entry Book Keeping by TS Grewal or Accountancy for Class 12 by DK Goel are excellent selections for a more complete and full understanding.
Practice on a Regular Basis: This is a broad subject that takes a great deal of patience and practice. Don't restrict yourself to the NCERT textbook's exercises and your reference books. Set up enough time to answer as many questions as you can, including samples and previous year's papers.
Pay Careful Attention to the Theory: The topics in the theory section of accounting test your knowledge of characteristics, benefits, and drawbacks. Don't forget about them. This is the secret to getting a good theoretical score. However, memorising them is insufficient. Make a practice of writing them down. The theory is the score booster. If you learn properly, you can easily score good marks in your accountancy examination.
Pay Attention to the Formats: Along with the ideas, you must be aware of the formats of the Balance Sheet, Trial Balance, and Journal Ledger Accounts. It is important to present them in the proper manner in order to receive excellent grades in accountancy. So, at home, practise sketching formats to improve your speed and accuracy. Narrations are crucial as well. Don't forget about them as they carry marks. Also, don’t forget to mention debit (dr.) and credit (cr.) on both sides.
The best approach to learning formulas is to do it the proper way. Accounting students must memorise a large number of formulas. Make formulas cheat sheets for each chapter and go over them periodically. This is a good approach to remembering them. However, before memorizing the formulae, attempt to comprehend how and why they were created. Creating a summary of formulas from every chapter makes it easier for the students to revise at the last minute.
Prepare Working Notes: This is a critical point. Working notes should be added to your responses as needed since they can help you get high grades. Make sure your notes are thorough and easy to comprehend. It gives clarity to teachers that the students are thorough with the concept, calculations.
Hope these tips help you score good marks. Keep these points in mind before appearing for the exam.
Best wishes!
FAQs on Capital Receipt vs. Revenue Receipt
1. What is the primary difference between a capital receipt and a revenue receipt?
The primary difference lies in their nature and impact on a business's financial position. Capital receipts are non-recurring (infrequent) and either create a liability (like a loan) or reduce an asset (like selling machinery). They are shown on the Balance Sheet. In contrast, revenue receipts are recurring (regular) and arise from the normal operations of the business, such as sales or interest received. They do not create new liabilities or reduce assets and are shown in the Income Statement. For more details, you can explore the key differences between Capital and Revenue Items.
2. Can you provide some common examples of capital and revenue receipts?
Certainly. Here are some common examples for each category:
- Capital Receipt Examples:
- Money received from the sale of fixed assets like land, buildings, or machinery.
- Capital contributed by owners or partners.
- Amount received from issuing shares or debentures.
- Loans received from a bank or financial institution.
- Revenue Receipt Examples:
- Revenue earned from the sale of goods or services.
- Interest or dividends received on investments.
- Commission or fees earned for services rendered.
- Rent received from a property.
3. How are capital and revenue receipts treated differently in the financial statements?
The accounting treatment for capital and revenue receipts is fundamentally different and affects different financial statements. Capital receipts are reported on the Balance Sheet. For instance, a loan received increases liabilities, and money from selling an asset reduces the value of assets. Revenue receipts, on the other hand, are considered income for the accounting period and are credited to the Profit and Loss Account (or Income Statement), directly impacting the calculation of profit or loss.
4. Why is a loan from a bank considered a capital receipt and not a revenue receipt?
A loan from a bank is a capital receipt because it creates a liability for the business. The company is obligated to repay this amount in the future. It is not income earned from the company's ordinary business activities; rather, it is a source of finance. Revenue receipts, like sales, do not create a corresponding obligation to be repaid. This distinction is crucial in both business accounting and for understanding the Government Budget and The Economy, where government borrowings are also treated as capital receipts.
5. Is GST collected by the government a capital receipt or a revenue receipt? Explain why.
GST (Goods and Services Tax) collected by the government is a revenue receipt. This is because it is a tax revenue that is regular and recurring in nature. Most importantly, it neither creates any liability for the government (it doesn't have to be repaid to the taxpayer) nor does it cause any reduction in the government's assets. It is part of the government's operational income used to fund its expenditure, fitting the definition of a revenue receipt perfectly.
6. How are 'Life Membership Fees' and 'donations' classified in a Not-for-Profit Organisation (NPO)?
In a Not-for-Profit Organisation (NPO), the classification depends on the item's nature and purpose:
- Life Membership Fees: This is treated as a capital receipt. Since it is a one-time payment received from a member for their entire life, it is non-recurring. It is directly added to the Capital Fund (or General Fund) on the liabilities side of the Balance Sheet.
- Donations: The classification depends on their purpose. Specific Donations (e.g., a donation for building a new wing) are treated as capital receipts and shown on the Balance Sheet until used for the specified purpose. General Donations, which can be used for any purpose, are typically treated as revenue receipts and are shown in the Income and Expenditure Account. You can learn more about these peculiar items in NPOs for better clarity.
7. How does the concept of 'source of income' versus 'income from the source' help differentiate between the two receipts?
This is a conceptual way to distinguish between the two. A capital receipt is generally an amount received from the 'source of income' itself. For example, selling a machine (the source that helps generate income) gives a capital receipt. In contrast, a revenue receipt is the 'income from the source'. For instance, the money earned by using that machine to produce and sell goods is a revenue receipt. This helps clarify that one impacts the income-generating capacity (capital) while the other is the result of that capacity (revenue).
