What Are Revenue Receipts And Capital Receipts?

Background

In any business the basic fuel that requires to keep the business alive is only an Income or Receipts. As the important purpose of an economic activity is to earn money business is generating different types of revenues.

We can bifurcate these Revenues or Receipts in two different categories i.e. Capital Receipts & Revenue Receipts.

What is Capital Receipts?

Capital receipts are those income that arising out of extraordinary activities in the business i.e. not generating on a day-to-day basis mostly it consists income of selling of any asset or generating Liabilities.

Such receipts are generally non-recurring, and a business can't record it as their regular source of income. In other words, they are cash flows generated from the sale of investments or assets like buildings, land, or jewellery.

As capital receipts are the result of transactions of assets and liabilities, they are part of the balance sheet. They are not reflected in the income or profit-and-loss statement.

Purpose of Capital Receipts

The only purpose of generating capital receipts is to enhance revenue-generating ability of an enterprise which can lead to a significant inflow of cash in a short duration.

An enterprise can use these huge funds in order invest in long term investments or paying of their Debts.

Taxability of Capital Receipts

As per income tax Capital receipts are not Taxable unless there is specific provision regarding taxability.

However, Capital gains arising out of those capital receipts from sale of immovable property or Capital Assets will liable to be taxed under the Head CAPITAL GAIN of income tax act.

Examples of capital Receipts

There are several ways in which a company can receive capital receipts. We illustrate it with some examples:

• Sell of any immovable property
• Initial public offering by any company to the public or shareholders
• Borrowing loans
• Insurance claims Government Grants received for specific purpose etc…

What is Revenue Receipts?

Revenue Receipts are those receipts that an enterprise generate on a day-to-day basis form their ordinary business activities which don't involve creation of any liability or selling of assets.

These revenues are recurring in nature as they are the products of the daily business of a company & will become part of profit & loss statement.

Purpose Of Revenue Receipts?

Revenue Receipts are key resource of business survival which provide sufficient funds to operate entity's daily operations.

With the help of daily earnings enterprises can expand their business operations to create good wealth.

Taxability of Revenue Receipts

As per the Income Tax Act 1961, all revenue receipts are taxable, unless they are specifically granted exemption from tax.

Thus, all revenue receipts of a company are taxed as part of its annual income.

Examples of Revenue Receipts

Majority revenues generating out of ordinary activities are fall under these category like,

1. Selling of Goods & services
2. Discount received
3. Commission income etc.

Difference between Capital Receipts & Revenue Receipts

We can find below mentioned points as key differences after considering the above discussion

1. Nature of occurrence
2. Taxability
3. Creation of liability
4. Accounting treatment