What is Capital Receipt? – Know its Features, Types and Importance

Capital receipts are funds that a business receives, which do not form a part of its revenue. Specifically, they create liabilities and reduce the total assets of a business. They might originate from the sale of fixed assets, debt or shares.

That said, all kinds of capital receipts are tax-free unless there is a particular provision of taxation on them. Read on to learn more about capital receipts.

What is a Capital Receipt?

In simple terms, capital receipts are cash inflows in a particular business that arise from financial activities instead of operating activities. To understand the meaning of capital receipts, you need to know that these receipts come from occasional activities and are not routine in nature. 

Capital receipts are not a business’s main income source. It either reduces the assets or increases the liabilities of a business. Because of their distinct nature, they feature in a company’s balance sheet instead of the income or profit and loss statement. 

The following points mention a few examples of capital receipts:

• Cash from shares sale in a business. This can include preferred and common stock.
• Cash received from the sale of a fixed asset. This can also include payment regarding insurance claims due to a damaged asset.
• Cash from debt instrument issue. This can include loans and bonds.

All such transactions are recorded on an accrual basis. Additionally, capital receipts are non-recurring. Thus, you can use them to distribute profits.

Features of Capital Receipts

Capital receipts do not influence the profit or loss of a business. Furthermore, they are booked soon after the establishment of a right to receipt. Mentioned below are a few distinct features of these receipts:

• They are non-recurring in nature.
• Funds that a business generates from such receipts arise from non-operational activities.
• It either reduces the assets of a business or increases its liabilities.
• It affects an organisation’s balance sheet.

Also Read: What Is Revenue Receipt? What Are The Differences Between Revenue Receipts And Capital Receipts?

Types of Capital Receipts

There are two types of capital receipts:

1. Debt Capital Receipts

These are receipts that the government is obligated to pay with interest. The government finances around 25% of its expenditure through borrowings. Any reduction in such receipts can take a massive leap for a country’s economy. 

That said, most of the government’s capital receipts comprise debt receipts. A few examples of them are the issuance of special securities, market loans, treasury bills, short-term borrowings and more. 

2. Non-Debt Capital Receipts

Non-debt capital receipts are those receipts that the government receives through the sale of assets. Around 75% of the government’s overall budget receipts consist of these receipts. A few examples of non-debt capital receipts include disinvestment, recovery of advances and loans, bonus share issues and more. 

Examples of Capital Receipts

An organisation can generate capital receipts due to various transactions. Mentioned below are a few capital receipts examples to help you understand the nature of such transactions:

• Cash or cash equivalents from the sale of assets, either tangible or intangible
• Loan amount disbursed from a bank or other financial institution
• Cash received from an insurance claim
• Capital gains from the sale of shares. This can be in the form of common or preferred stock
• Cash from bond payments or incoming loans
• Cash investments from a new partner in business
• Debentures and other debt instruments issues

Evidently, most of these transactions do not happen on a regular basis. Because they occur occasionally, you cannot record them in an income statement. However, an exception here is shares. Since some shares are sold on a subscription basis, you would put them on your company’s business sheet.

Also Read: What are Balanced Advantage Funds? 4 Top Reasons to Invest in Them

Differences between Revenue and Capital Expenditure

CAPEX, or capital expenditure, are funds utilised to acquire, upgrade or maintain long-term assets. Such expenses do not occur regularly and are taken into account to develop a company’s performance for the long term.

A few examples of capital expenditure include:

• Tangible asset purchases, such as plants, machinery, furniture, equipment and more.
• Intangible asset purchases, such as trademarks, patents, licenses etc.

Typically, CAPEX assists in boosting an organisation’s short-term and long-term financials and also helps in increasing its overall business performance. Moreover, CAPEX also features depreciation every year. Such expenses feature both in a firm’s cash flow statement and balance sheet. 

On the other hand, OPEX or revenue expenditure refers to expenses that a firm experiences during its operations. In simple terms, it is the total expenses incurred by a firm through various production activities. In most circumstances, such expenses do not create assets. Additionally, benefits from such expenses are limited to one year.

Revenue expenditures do not affect the profit earning capacity of a business. However, they play a major role in managing a company’s operational activities. 

A few examples of revenue expenditures are:

• Freight charges
• Rent commissions
• Salaries

That said, to understand the difference between capital receipts and revenue receipts, you need to know that revenue receipts originate from regular business activities. On the other hand, capital receipts come from occasional non-business activities.

Final Word

Capital receiptsare cash flow receipts that refer to a business’s inflows which are non-recurring in nature and can create liabilities for the business. In business accounting, they are not recorded on a normal income statement. Business owners should learn all the important details of capital receipts for successful operations. 

FAQs on Capital Receipts

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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.