Revenue Receipts and Capital Receipts- All That You Need to Know
Making money is the most crucial goal for any firm. There are various techniques that a company might take to reach this objective. A business typically keeps two crucial financial statements to track its financial progress. They are known as balance sheets and income statements. In accordance with this distinction, a firm or government creates two sorts of receipts during its financial operations. They are known as revenue receipts and capital receipts. You can read this article to learn about the meanings and distinctions between the two terms.
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Understanding Revenue Receipts
Revenue receipts are the funds earned by a business via its day-to-day operations. These are recurring in nature and have a direct impact on the business's profits and losses. Thus, revenue receipts must be disclosed in the company's or organization's income statement. In general, revenue receipts do not generate any liabilities for the business and do not reduce its assets. It simply means that goods or services were supplied to customers in exchange for payment. Finally, it provides a source of cash input, resulting in a rise in a company's total revenue.
Purpose of Revenue Receipts
Revenue revenues are an important resource for a business. The primary reason for a business's existence is to create revenue. On a daily basis, revenue receipts contribute to this goal. This has further ramifications. For example, when a company sells goods and services on the market, it increases the number of options available to customers. With more income, a company can expand its operations, hiring more people and providing more employment and wealth for the national economy. Revenue receipt has two primary advantages: it does not result in the formation of liabilities or the sale of major assets. It is a repeating phenomenon. Thus, it is vital for not only achievement but also the survival of a company.
Features of Revenue Receipts
Revenue is derived directly from a business's operations.
It has a direct impact on business profits and losses. As income is collected by a corporation, it either increases profits or contributes to losses.
Benefits from revenue collections might be used for a limited period of time, such as one accounting or financial year.
Because the benefits from income receipts exist for a limited period of time, another element comes in the form of a recurring nature.
Disclosure is given in the Trading and Profit or Loss account, not on the Balance Sheet.
Examples of Revenue Receipts
Regular product and service sales contribute to a company's revenue receipts. For example, whether you buy meals from a food delivery service or clothes from an e-commerce website, the transaction is recorded in the company's income statement and included in its revenue receipts.
Tax money: A government's money from imposing taxes is included in its receipts. The government utilises this money to fund plans, projects, and national welfare. This can be further classified as direct and indirect taxes. Direct tax applies to people, organisations, and inherited wealth. Examples include income tax, wealth tax, corporate tax, capital gains tax, and so on. All of these factors can increase a government's revenue. Indirect Taxes: These are taxes levied on products and services. In this instance, the responsibility for paying taxes might be transferred from one portion of the supply chain to another.
Non-Tax Revenue: As the name implies, this refers to revenue receipts that are not derived from taxes. For governments, this includes service fees, loan interest, fines and penalties, profits and dividends from public-sector undertakings, and so on.
Receiving Discounts: When a firm obtains discounts from its suppliers or vendors, it is considered a revenue reception because it does not raise the company's obligations.
Tax Status of Revenue Receipts
According to the official website of the Income Tax Department, under the IT Act of 1961, all revenue receipts are taxable unless specifically exempted. Thus, a company's revenue receipts are taxed as part of its annual income.
Understanding Capital Receipts
Capital revenues are cash inflows into a business that result from financial (capital) activities rather than business operations. These are receipts from one-time or non-recurring activities. Capital receipts are not a regular or primary source of income for a company. As a result, the company entity either incurs an obligation or loses assets. Furthermore, because of their capital nature, such receipts are reported on a company's balance sheet rather than the income statement or profit and loss account. These receipts are recorded on an accrual basis (which means that you are recording income for which you have the right but have yet to receive it). Furthermore, unlike revenue payments, capital receipts are non-recurring and cannot be used to distribute profits.
Purpose of Capital Receipts
Capital receipts are primarily intended to boost an enterprise's revenue-generating capabilities. It has the potential to generate a large amount of cash in a short period of time. This can be utilised to make long-term investments or pay off debt, increasing an enterprise's financial viability. For example, the Indian government establishes annual disinvestment targets as a means of increasing revenue and managing the economy's fiscal deficit.
Features of Capital Receipts
Capital receipts are not recurrent in nature.
Capital receipts produce funds from non-operating activities.
It either generates a liability or diminishes an asset.
It has no effect on the income statement; however, capital receipts affect the balance sheet.
Examples of Capital Receipts
Borrowing Loans: Borrowings are capital receipts generated by taking out loans or issuing debt instruments such as bonds or Treasury bills (T-bills). On the balance sheet, these borrowings are classified as a liability. When the interest is paid on these loans, it will be recorded as an expense. Borrowings generate debt-oriented capital receipts. A corporation can obtain a loan from a bank or financial institution to fund a new project or commercial venture. This is classified as a liability on the balance sheet because the corporation is required to repay it with interest. It is also a capital receipt because it is reported as inflows into the company's cash account.
Selling Shares to the Public and Shareholders: When a private firm sells shares to the public for the first time, it must conduct an Initial Public Offering (IPO). It marks the company's debut on the stock exchange. Those who buy the company's shares are the main market shareholders. After a stock is launched on a stock exchange, these investors can sell their shares for a higher price than they paid for them. Capital gains are realised when shares are sold on the secondary market. When they acquire shares, they are essentially giving the corporation money. Thus, it strengthens the company's capital receipts. IPOs are a significant source of funding for companies.
Debentures and Other Debt Instruments: Bonds and debentures are common debt instruments issued by governments and enterprises. They function similarly to loans in that they help finance the activity of a corporation or the government. Debentures are not collateralized, and their purchase is based on the issuer's credibility and reputation. Companies issue debentures because they have long payback duration and cheap interest rates.
Small Savings Scheme: Similar to borrowings, this is a debt capital receipt that creates a liability for the government. Some well-known examples of small savings plans in India include National Saving Certificates, Kisan Vikas Patra, Sukanya Samriddhi Scheme, and Post Office Time Deposits.
Insurance Claims for Physical Damage: Companies can get insurance to cover their equipment or hardware. After assessing its risk exposure, a corporation can determine how much money it should spend on insurance. Insurance claims are classified as capital receipts since they involve monetary inflows.
Tax Status of Capital Receipts
Capital receipts are generally tax-free unless otherwise specified. A capital receipt is only subject to capital gains tax if it entails a capital asset transaction. There is no special provision for taxing capital receipts. Capital gains are the price increase of an asset when it is sold. It refers to the gap between the final and original prices of a capital asset. A capital asset can include stocks, bonds, and tangible fixed assets like machinery, inventory, and land.
Difference between Revenue and Capital Receipts
Revenue Expenditure
Revenue expenditure is short-term in nature and includes routine day-to-day company expenses as well as expenses made during the repair and maintenance of revenue-generating assets. These are recurring in nature since they cover all expenses associated with repainting, renewal, and routine maintenance of fixed assets utilised to generate revenue. Examples include the expenses on the sale of products, general and administrative expenses, repairs, maintenance, etc.
Capital Expenditure
Capital expenditure is incurred in order to obtain long-term (greater than one year) assets for the firm. Capital expenditures are generally defined as investments in fixed assets that have a long-term influence on productivity. Because it is for the long run, it is charged gradually using the depreciation technique. Examples include the acquisition of land, plant, building, equipment, fixtures, etc.
Conclusion
Both revenue and capital receipts indicate a company's income in unique ways. Therefore, both can be used to assess a company's financial health. Both sources of revenue can be used to increase a company's operations. However, they may affect the company’s taxes in different ways. It is essential to consult an expert to understand their treatment while computing your taxes.
FAQ
Q1. What is a revenue and capital receipt?
These are two distinct forms of receipts that a business uses to generate income. Revenue is earned by the regular sale of goods and services. It is reflected on the income statement.
Q2. What's the difference between capital and revenue receipts?
Capital receipts are generated by incurring liabilities or selling assets, whereas revenue receipts are generated by everyday company activity such as purchasing and selling items.
Q3. Is revenue receipt taxable?
Revenue receipts are taxable unless an exemption has been granted.
Q4. Is capital receipt taxable?
The Income Tax Department's official website states that "all capital receipts are exempt from tax unless there is a specific provision for taxing them."
Q5. What is the primary purpose of Capital Receipts for a business or government?
The primary purpose of Capital Receipts for both businesses and governments is to raise funds for long-term investments, assets, or capital expenditures. These receipts are not meant for regular operational expenses but are utilized for enhancing the entity's capital base.
Q6. How do Revenue Receipts contribute to government revenue?
Revenue Receipts contribute to government revenue by encompassing funds generated from day-to-day operations, such as taxes, fees, and income. These receipts support the government in meeting its regular expenditure and operational requirements.
Q7. Can a loan taken by a government be classified as a Revenue Receipt?
No, a loan taken by a government is not classified as a Revenue Receipt. It falls under Capital Receipts as it involves the inflow of funds for long-term investments, infrastructure development, or other capital expenditures.
Q8. How are Revenue Receipts and Capital Receipts reflected in financial statements?
Revenue Receipts and Capital Receipts are reflected differently in financial statements. Revenue Receipts contribute to the income statement, indicating the entity's operational performance, while Capital Receipts are typically recorded in the balance sheet as they involve capital transactions.
Q9. Are grants received by a government considered Revenue or Capital Receipts?
Grants received by a government are usually considered Capital Receipts. These funds are often designated for specific projects, capital investments, or infrastructure development, aligning them with the nature of Capital Receipts.
Q10. How do Revenue Receipts and Capital Receipts impact the overall financial health of an entity?
Revenue Receipts and Capital Receipts play distinct roles. While Revenue Receipts sustain day-to-day operations and ensure liquidity, Capital Receipts contribute to long-term growth and development. Balancing both types of receipts is crucial for maintaining a healthy and sustainable financial position.
Q11. What are the items categorised as revenue and capital receipts?
Revenue receipts are created from the ongoing activities of a firm and include money from sales, rents, discounts, dividends, and so on. Capital receipts lead to the formation of new assets for a corporation. These include non-recurring revenue sources such as borrowings, asset sales, and investments.
Q12. Where are all revenue receipts and expenditures shown?
Revenue receipts are credited to the income account and appear on the credit side of the Income and Expenditure account
