What are Capital Receipts and What are its Types?
The concept of a receipt is easy to understand as it is described as a written record that a payment has been made in exchange for goods or services. When it comes to accounts, receipts reveal a lot about business. While some receipts are recurring in nature, others like capital receipts represent one-time occurrences.
In this blog, we will explore basic details about capital receipts which enhance the overall capital of a company but are not classified as income. Read on!
What are Capital Receipts?
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.
Examples of Capital Receipts
An organisation can generate capital receipts due to various transactions. Mentioned below are a few 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.
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, they are non-recurring. Thus, you can use them to distribute profits.
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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.
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.
Final Word
Capital receipts are 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
Ans: One of the primary features of revenue receipts is that benefits from such receipts last for a short time, at most one accounting year. They are also recurring in nature and directly affect a business’s profit and loss statements.
Ans: For taxation on a receipt, it needs to be an income. This can either be in a general sense or in a sense specifically defined in the tax laws. Capital receipts are only taxable when there is a transfer of capital assets, in which case they will be taxed as capital gains. If there is no transfer of assets, capital receipts are not subject to taxes.
Ans: The yield from revenue expenditures is generally limited to the current accounting year. In simple terms, they are short-term in nature. On the other hand, expenses related to capital expenditure yield do not have a limit of one accounting year. They are long-term in nature.
Ans: One of the primary points of difference between capital and revenue expenditures is their depreciation. While capital expenses feature depreciation on assets, revenue expenditures face no such compulsions. They are free from the effects of depreciation.
Ans: Revenue receipts are classified as tax and non-tax revenues. Tax revenue is a legal requirement that individuals and businesses need to fulfil without expecting any direct benefit. Meanwhile, non-tax revenue is the recurring income that the government earns from sources other than tax.
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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.
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