Differences Between Capital Receipts and Revenue Receipts
Receipts are described as written records of the amounts paid in exchange for goods or services. Businesses need to record financial transactions to keep track of their expenses and profitability as well as for taxation purposes. Not all receipts contribute towards the profit or loss of a company. These receipts can be broadly classified into revenue receipts and capital receipts.
Read on to know the key differences between capital receipts and revenue receipts and their features.
What are Capital Receipts?
Capital receipts are payments that companies receive that reduce financial assets or create liabilities. They are also described as incoming cash flows and can be both debt and non-debt receipts.
The non-operating operations of a company are responsible for generating these payments and the funds are recorded on the company’s balance sheet instead of its income statements. Loans from RBI (Reserve Bank of India), foreign governments and the general public form an integral part of a company’s capital receipts.
What are Revenue Receipts?
Any income earned from the core business operation of a company or business is known as the revenue receipt. These receipts directly influence the profit or loss of the entity as they come from core business activity. This receipt is of a recurring nature and is used to meet the daily expenses of the business.
Differences Between Capital Receipts and Revenue Receipts
The differences between capital and revenue receipts are as follows:
| Parameter | Revenue Receipts | Capital Receipts |
| Meaning | Revenue receipts come from core operational activities of the business. | Capital receipts are those that come from the financial activities of the business. |
| Nature | They are recurring in nature | They are non-recurring in nature |
| Examples | Receipts from sale of goods or services offered by the business constitute revenue receipts. | Receipts from sale of assets of the business are capital receipts. |
| Source | Sources of revenue receipts are operational activities. | Sources of capital receipts are non-operational activities. |
| Found in/Shown in | Income statement | Balance sheet |
| Impact on profit | The revenue receipt of a company has an impact on its profits. | Capital receipt of an organisation has no or minimal impact on its profits. |
| Disclosure | Companies disclose these receipts on the income statement. | These are shown in the liabilities section of a company’s balance sheet. |
| Reserve surplus | Companies can use these receipts to create a surplus. | Companies cannot use capital receipts to create a reserve surplus. |
| Term | Short-term | Long-term |
| Matching Concept | These are matched with revenue receipts to record profit/loss of the year. | These are not matched/analysed with capital expenditure. |
Features of Capital Receipts
- Capital receipts either decrease the assets or create a new liability
- These are not used to fund reserves
- Capital receipts have no effect on income statements. Instead, they affect a company’s balance sheets
- They record payments that are non-recurring in nature
- The profits recorded in these receipts are realised by the business owner
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Features of Revenue Receipts
- Revenue receipts are those that come from core business operations of the company or a profession
- All revenue receipts must be recorded on the credit side of Profit and Loss accounts
- Companies may use part of revenue receipts to create reserve funds
- Companies can accrue short-term benefits from revenue receipts
- Revenue receipts will either increase profits or lead to losses
- These are of recurring nature
Final Word
To sum up, capital receipts create liabilities or reduce the financial assets of a company while revenue receipts are received by a company from its primary business operations. If investors understand the concepts of capital receipts and revenue receipts, they can make better decisions about which firms to invest in.
For instance, generally, people think twice before investing in an entity that has more capital receipts than revenue receipts as it reflects the firm’s inability to survive.
FAQs
Ans: Revenues are income earned by businesses or professionals for the sale of goods and services, rent receipts, royalties, etc. On the other hand, tax is levied by the government that it earns from taxpayers.
Ans: Some examples of capital receipts are the amount received after selling an asset, claim amount from insurance, loan from financial institutions, investment in businesses by investors, etc.
Ans: Expenses incurred by a business house for the sale of their goods or services come under revenue expenses. Apart from this, regular administrative expenses and expenses incurred on repairs and maintenance also forms a part of revenue expenditure.
Ans: A donation is a payment made to a non-profit organisation. When such donations are given without any specific objective, then it comes under the revenue receipt head of the organisation. At the same time, any donation given for a specific objective will always come under capital receipt.
Ans: Some features of capital receipts are as follows:
1. These receipts are non-recurring.
2. Capital receipts do not come from core business activities.
3. It does not influence the profit or loss of the company.
Disclaimer
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
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