A receipt is the inflow of money into the business which indicates the money received by a business enterprise. A receipt of money is considered as capital receipt when a contribution is made by the proprietor, partners or shareholders towards the capital of the business or a contribution of capital by someone outside the business. As such capital receipt creates a liability for the business. Capital receipts do not have any effect on profit or losses of the business enterprise. Capital receipts can take one or more of the following forms:
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A receipt of money is considered as revenue receipt when it is received from customers for goods supplied, or fees received for services rendered in the ordinary course of business, which is result of the firm’s activity in the current period. Revenue receipts increases the profits and reduce the losses of the firm and as such credited to trading, profit & loss account or income statement.
Examples of Revenue Receipts:
1. Sale proceeds of goods in which the firm deals.
2. Discount received.
3. Commission received.
4. Interest received.
5. Dividend received on investment.
6. Subscriptions received.
7. Rent received etc.
Capital and Revenue Profits
There is a lot of difference between the capital and revenue profit. Capital profit is the profit gained due to sale of a fixed asset. For example a building which was earlier purchased for Rs. 2, 20,000 is sold for Rs.3,25,000 the profit Rs.1,05,000 thus made is capital profit.
Capital profit earned should be transferred to the capital account of the proprietor or credited to capital reserve account and this appears as a liability on the balance sheet. Capital profit is never transferred in the profit and loss account as this contains items that are earned as revenue profit. Whenever there is a transaction of revenue profit is done only receipts and payments are entered in the P&L account and under no circumstances are capital profit transactions are entered.
Capital and Revenue Losses
Capital loss is opposite of capital profit. It is a loss arising due to sale of fixed asset or loss due to raising funds for business purpose. It is better to write off capital loss in the balance sheet instead of even showing it as liability since the asset is fictitious.
Revenue loss is loss occurred in normal business operations such as loss incurred while selling goods. Unlike capital loss revenue losses are charged to profit and loss account of the year in which they occur.