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Capital and Revenue Receipts

"Money received - but is it income or something else?"

Just like expenditure, receipts are also classified into Capital and Revenue. This classification determines whether they appear in the Balance Sheet or Profit & Loss Account.

What are Receipts?

Receipts = Money/value received by the business.

Classification is crucial:

  • Wrong classification → Wrong profit calculation
  • Wrong classification → Wrong tax liability

Capital Receipts

Definition: Receipts that create a liability or reduce an asset, and do NOT relate to regular business operations.

Characteristics:

  • Non-recurring (one-time)
  • Not from normal business operations
  • NOT shown in P&L (not income)
  • Shown in Balance Sheet (liability or reduction in asset)

Examples

✅ Capital introduced by owner → Liability (Capital)
✅ Loans taken from bank → Liability (Loan)
✅ Sale of fixed assets (machinery, building) → Reduction in asset
✅ Proceeds from issue of shares/debentures → Liability (Share Capital)
✅ Insurance claim received for lost asset → Reduction in asset
✅ Subsidies for purchase of assets → Reduction in asset cost

Revenue Receipts

Definition: Receipts from regular business operations or other sources that do NOT create liability or reduce assets.

Characteristics:

  • Recurring (regular)
  • From normal business operations
  • Shown in P&L (income)
  • Increases profit

Examples

✅ Sales of goods (cash or credit) → Trading Income
✅ Services rendered → Operating income
✅ Commission received → Other income
✅ Discount received from suppliers → Other income
✅ Interest received on deposits → Other income
✅ Rent received from property → Other income
✅ Dividend received on investments → Other income

Detailed Comparison

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Borderline Cases

1. Sale of Fixed Asset

Parts:

  • Book Value recovered → Capital Receipt (reduction in asset)
  • Profit on sale (if sale price > book value) → Revenue Receipt (income in P&L)

Example:

  • Machine book value: ₹50,000
  • Sold for: ₹60,000
  • Capital Receipt: ₹50,000
  • Revenue Receipt (Profit on Sale): ₹10,000

2. Scrap Sale

Scrap from fixed asset (e.g., old machinery scrapped) → Capital Receipt
Scrap from normal operations (e.g., waste material from production) → Revenue Receipt

3. Insurance Claim

For lost fixed asset → Capital Receipt
For lost stock/goods → Revenue Receipt

4. Subsidies

For acquiring fixed asset (e.g., govt subsidy to buy solar panels) → Capital Receipt (reduce asset cost)
For meeting expenses (e.g., export subsidy, wage subsidy) → Revenue Receipt (income)

Real-World Examples

Amazon India - Capital Receipts

  • Raised ₹3,000 Crores from Amazon Global (equity infusion) → Capital Receipt
  • Took loan of ₹500 Crores from HDFC Bank → Capital Receipt
  • Sold old warehouse building for ₹50 Crores → Capital Receipt

Amazon India - Revenue Receipts

  • E-commerce sales ₹10,000 Crores → Revenue Receipt
  • Advertising revenue ₹200 Crores → Revenue Receipt
  • AWS cloud services ₹500 Crores → Revenue Receipt

Accounting Treatment

Capital Receipts - Journal Entries

Loan from bank:

Bank A/c                        Dr.    ₹10,00,000
    To Bank Loan A/c                       ₹10,00,000
(Being loan received from bank)

Sale of machinery:

Cash/Bank A/c                   Dr.    ₹60,000
    To Machinery A/c                       ₹50,000
    To Profit on Sale of Asset A/c         ₹10,000
(Being machinery sold)

Revenue Receipts - Journal Entries

Cash sales:

Cash A/c                        Dr.    ₹50,000
    To Sales A/c                           ₹50,000
(Being goods sold for cash)

Commission received:

Cash A/c                        Dr.    ₹5,000
    To Commission Received A/c             ₹5,000
(Being commission received)

Tax Implications

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Decision Tree

Ask yourself:

  1. Is it from regular business? → Revenue Receipt
  2. Is it from sale of fixed asset? → Capital Receipt
  3. Is it a loan/capital? → Capital Receipt
  4. Is it creating a liability? → Capital Receipt
  5. Is it reducing an asset permanently? → Capital Receipt
  6. If none of above → Revenue Receipt

Common Exam Questions

Q: Sale of old furniture for ₹10,000 (book value ₹8,000). Nature of receipt?
A: ₹8,000 Capital Receipt, ₹2,000 Revenue Receipt (profit)

Q: Loan received from ICICI Bank ₹5,00,000. Nature?
A: Capital Receipt (creates liability)

Q: Dividend received on shares ₹20,000. Nature?
A: Revenue Receipt (shown in P&L as income)

Quiz: Capital and Revenue Receipts

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