Revenue Receipts and Capital Receipts

Revenue Receipts

Revenue Receipts are those receipts that neither reduce the company’s assets nor create any liability. They are always recurring in nature and earned during the normal course of business.

From the definition, it is clear that any type of receipt needs to satisfy one of the two conditions to be called as revenue receipt:

• It must not reduce the assets of the company.
• It must not create any liability for the company.

Features of Revenue Receipts

Since revenue receipts seem to be the opposite of capital receipts, it makes perfect sense to look at different features of revenue receipts to understand the meaning of revenue receipts and compare them to the features of capital receipts.

• Applicable for a short term: Revenue receipts are money received for a short period. The benefit of revenue receipts can only be enjoyed for one accounting year and not more.
• Means for Survival: A business starts its operations because it expects to receive money due to its service to its customers. Either they can sell many products, or they can offer services. No matter what they do, without revenue receipts, they can’t survive for long because revenue receipts are collected from the direct operations of the business.
• Recurring: Since revenue receipts offer benefits for a short period, the revenue receipts must be recurring. If revenue receipts don’t recur, the business wouldn’t be able to perpetuate for long.
• Affects the profit/loss: Receiving revenue directly affects the profit/loss of the business. When the revenue is received, either profit is increased, or loss is decreased.
• A small amount (Volume): Compared to capital receipts, the number of revenue receipts is usually smaller. That doesn’t mean all revenue receipts are smaller. For example, if a company sells 1 million products in a given year, the revenue receipts could be huge and more than its capital receipts during the year.

Capital Receipts

Capital receipts are payments received by a company that are not income in nature and enhance the company’s overall capital. These are funds generated by a company’s non-operating operations and appear on the balance sheet rather than the income statement.

They are non-recurring, meaning they do not occur regularly and cannot be used for profit distribution. Unlike revenue receipts, which can be used to fund reserves, capital receipts are not utilized to fund reserves. They end up increasing a company’s obligations or decreasing its assets. These types of receipts have no impact on an organization’s total profit or loss and are recorded on an accrual basis, which means they are recorded as soon as the right of receipt is established.

Characteristics of Capital Receipts

• Capital revenues are one-time events.
• Capital receipts produce funds for non-operating activities.
• It either increases the responsibility or decreases the asset.
• It makes no difference to the income statement.

The following are the examples of capital expenditure:

• Expenditure incurred for acquisition of fixed tangible assets such as land, building, machinery, furniture, motor vehicle etc.
• Expenditure incurred for improvement or extension of fixed assets such as increasing the seating capacity of a theatre.
• Expenditure incurred to bring the fixed assets to the place of their use and expenditure incurred on their installation or erection such as freight on fixed assets, wages paid for installation.
• Expenditure incurred for the purchase of intangible assets such as goodwill, patent rights, and trademarks, copyright, etc.
• Expenditure incurred for reconditioning of old fixed assets such as expenditure incurred on repairing or overhealing of secondhand machinery.
• Major repairs and replacement of plant which increase the efficiency of the plant.
• The cost of shifting a plant to another place is a capital expenditure [Sultanpur Sugar Works Ltd. vs. CIT (1963) 49 ITR 160 SC]
• Treatment of Capital Expenditure. Capital expenditure is capitalised. It is written off over the estimated useful life of the asset. For example, when machinery is purchased, Machinery Account is debited at the price paid for it and later shown in the Balance Sheet as an asset after deducting depreciation. Similarly, wages paid for the installation of machinery is capitalised by debiting the Machinery Account.

Rules for Determining Capital Expenditure. The following are the rules for determining capital expenditure:

• An expenditure is capital expenditure, if it is incurred for acquiring a long-term asset (having a useful life of more than one year) for use in the business to earn revenue and not meant for sale.
• An expenditure is capital expenditure, if it is incurred to put an asset into working condition. For example, the transportation and installation charges are added to the cost of machine. Similarly, the legal charges like registration and stamp duty is added to the cost of land and building. Again, architect fee paid for supervising construction of building is capitalised.
• An expenditure incurred for putting an old asset into working condition is treated as capital expenditure and added to the cost of the asset.
• An expenditure incurred to increase the earning capacity of a business is treated as capital expenditure. For example, expenditure incurred for shifting the factory to convenient site is a capital expenditure.
• Borrowing costs (e., interest and other costs incurred by an enterprise in connection with the borrowing of funds) that are directly attributable to the acquisition, construction or production of a qualifying asset should be capitalised as part of the cost of that asset till the asset is ready for its intended use or sale as per AS-16: Borrowing costs.