Capital Receipt and Revenue Receipt are an integral part of business activity, just like capital expenditure and revenue expenditure. Both represent an inflow of cash for the business. Although both are an integral part of business activity, capital and revenue receipts differ from each other in various aspects. Knowing the difference between Capital Receipt vs Revenue Receipt is extremely important to manage the business properly.
Before we detail the differences between capital receipt vs revenue receipt, let’s understand what both these concepts mean.
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Capital Receipt vs Revenue Receipt – Meaning
Capital receipts are the income from non-recurring streams, or from non-usual business operations. They result in an increase in the total capital of a company and are shown in the balance sheet. Therefore, capital receipts constitute financing and investing activities and not operating activities. Sources of capital receipts are – share issue, debenture issue, a loan from a bank or financial institution, a grant from the government, insurance claim or any additional claim by the proprietor.
Revenue receipts, on the other hand, are the outcome of core business activities. Or, it is the income that a company earns from its day-to-day operations. In simple words, all activities happening on a daily basis that brings in cash for the business form part of a revenue receipt. The following are the sources for revenue receipts – rent, services offered by the business, sale of inventory, and more.
Capital Receipt vs Revenue Receipt – Differences
Following are the differences between capital receipt vs revenue receipt:
Capital receipts are the revenue that a company gets from non-recurring sources, such as from financing and investing activities. A few examples of capital receipts are government grant, share issue, loan and more.
Revenue receipts, on the other hand, are receipts from normal business operations. A few sources of revenue receipts are revenue from sales, discount from creditors and more
Capital receipts are of non-recurring nature, whereas revenue receipts are recurring in nature.
A receipt must fulfill at least one of the two conditions to be called as a capital receipt – it must create liability or lead to a reduction in the asset.
A receipt must fulfill at least one of the following two conditions to be called as revenue receipt – do not reduce the asset of a company or create any new liability.
Capital receipts are of long-term nature, while revenue receipts are for the short-term. Meaning, benefits of capital receipts are usually for more than a year, while for revenue receipts, the benefit is usually for one financial year.
Capital receipts are not used to create reserves funds because they either increase the liability or reduce the asset of the company. Revenue receipts, on the other hand, can be used to create the reserve fund since they generate direct profit for a business.
Loans are part of the capital receipts. Companies apply and get a loan, and this leads to capital receipt. However, it also increases the liability of the company as the company has to repay the loan along with interest. Revenue receipts do not include loans as taking loans is not part of normal business operations.
Businesses use capital receipts for several purposes, such as for meeting capital expenditure, clearing debts, buying asset and more. On the contrary, revenue receipts come into use for meeting revenue expenditure, such as paying rent, electricity, salary and more.
Impact on Profit and Loss
Capital receipts have no direct impact on the profit or loss of business. Revenue receipt, on the other hand, directly impacts the profit and loss of a company.
Impact on Asset and Liability
A capital receipt could either result in a drop in the asset, or a rise in the value of the liability. For example, the sale of assets leads to a decrease in the value of an asset. Revenue receipt, on the other hand, has no direct impact on the value of asset or liability.
Both capital and revenue receipt is an integral part of a business. A business won’t be able to survive in the absence of mismanagement of either of the two. From an investor’s point of view also, understanding capital receipt vs revenue receipt is very essential. It helps the investor to decide whether or not to invest in a company. For instance, a company with more capital receipt than revenue receipt might prove a risky bet.1March 5th, 2020