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How do I distinguish between capital receipt and revenue receipt?

A business generally receives two different types of receipts – capital receipt and revenue receipt. To understand the difference between capital receipt and revenue receipt, you need first to understand the nature of these earnings.

What is a capital receipt?
Any income that is non-recurring in nature is known as a capital receipt. This income generally arises from financing or investment activities. Additionally, capital receipts either decrease an asset or increase liability.

The benefit of a capital receipt is usually enjoyed over a longer period of time. Some of the sources of capital receipts are listed below.

  • Issue of equity shares or debentures
  • Loans availed from a financial institution
  • Maturity and other benefits received from  insurance claims
  • Capital introduction by a promoter or owner
  • Sale of assets like plant and machinery, land, and investments

What is a revenue receipt?
Any income that is received in the normal course of business is known as a revenue receipt. These receipts are recurring in nature and constitute a significant source of income for the recipient, as they arise from core business activities, employment, or profession.

  Unlike capital receipts, the benefits of a revenue receipt are short-lived. However, revenue receipts can be used to meet the daily expenses incurred by the recipient. Listed below are some of the sources of revenue receipts.

  • Income from the sale of goods or services
  • Rent receipts
  • Interest receipts
  • Supplier or creditor discounts
  • Dividend receipts

How can you distinguish between a capital receipt and a revenue receipt?
Distinguishing between these two receipts is easy once you know how to spot the differences between them. These receipts follow set patterns and typically do not deviate from them. Here are some pointers that can help you tell the difference between capital receipt and revenue receipt.

Origin:Capital receipts originate from non-operational activities while revenue receipts originate from operational activities.

Frequency:Capital receipts are non-recurring by nature, while revenue receipts are recurring.

Reserve Funds:Capital receipts cannot be utilized to create any reserve funds. However, revenue receipts can be saved up to create a reserve fund.

Distribution:Unlike capital receipts, only revenue receipts can be used for the distribution of profits.

Impact on business:Since the source of capital receipts is not from any operational activity, they do not affect the profit or loss of a business concerned. However, revenue receipts have a considerable impact on the profit and loss of the entity.

Financial Statements:Capital receipts show up in the liabilities side of the balance sheet, while revenue receipts are only listed in the profit and loss statement.

Conclusion
Irrespective of the difference between capital receipt and revenue receipt, both are essential components for a business concern. Their role in the functioning and growth of the receiving entity is crucial for turning profits and for running everyday operations.

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