Capital and Revenue Receipts.
Welcome to Capital and Revenue receipts topic. Under this part, learn definitions of Capital Receipts and Revenue Receipts, understand the important differences between Capital Receipts and Revenue Receipts, understand the effect of incorrect treatment of capital receipts and revenue receipts on profit for the year and on the statement of financial position.
“Amount received from the sale of a non-current asset or the receipts which do not reoccur in the same accounting year is known as Capital Receipt.”
Check out the following examples to comprehend the capital
Amount received from the sale of old Plant and Machinery.
received from issue of fresh share capital.
Amount received from issue of debenture.
Amount received from
Amount received from the mortgage of property.
Amount received from a long-term bank loan.
Important points to remember:
Receipts either decrease the value of a non-current assets or increase the value of a non-current
Receipts are of non-reoccurring nature.
They do not recur in the same accounting year.
Check out the following links:
received from normal day-to-day trading activities of the business is known as revenue
out the following examples to comprehend the Revenue Receipts:
sale of inventory.
from trade payables for prompt payment.
received from the manufacturer.
received from “The Bank of England.”
Entrance fee or membership fee received from the members.
points to remember:
receipts are of recurring nature. They recur several times in an accounting
receipts are recorded in the Income Statement.
receipts increase the Gross Profit and/or Profit for the year.
Segregation of a single receipt as Capital and Revenue receipts.
the above explanation and examples, we comprehend what a capital receipt is and what a
revenue receipt is. However, sometimes we
need to treat a single receipt as both capital receipt and revenue receipt. Though it is sporadic to get questions from this
area in O level Principles of Accounts and IGCSE Accounting, we can not completely rule out the possibility of getting questions from this area.
Eg:(Past paper question): O Level Principles of Account (7110/12-Paper
1-Multiple Choice-October/November 2013=Q.No:11)
let us discuss, how to treat a single receipt as both capital and revenue receipt.
example. We bought a motor vehicle at
the cost price of $ 5,000 and after three years of usage we have decided to dispose it, and on that day, it’s
book value stands at $2 900.
Let's discuss three different scenarios:
One: We sold the motor vehicle for $2,500
if the sale proceeds are less than the book value of the asset, entire sale
proceeds must be treated as Captial Receipt.
$2,500 is Captial Receipt.
Two: We sold the motor vehicle for $4,500
If the sale proceeds are more than the book value and less than the cost price,
then the receipt should be divided as:
- Up to book value
of the asset is Captial Receipt
- Excess of book
value is Revenue Receipt.
So, $2,900 is Capital Receipt and $1,600 is
Scenario Three: We
sold the motor vehicle for $5800
Note: If the sale proceeds are more than the cost
price of the asset, then the receipts should be divided as:
- Up to book value of
the asset is Capital Receipt
- Between book
value and Cost is Revenue Receipt
- The excess over
cost price is Capital Receipt.
So, the total Capital Receipt is $3,700 and Revenue Receipt is $ 2,100.
The differences between Capital and Revenue Receipts.
||It is an amount received from the sale of a non-current asset.
||It is an amount received from the day-to-day running activities of the business.
||The amount received is usually more.
||The amount received is usually little.
||It is a non-recurring receipt.
||It is a recurring receipt.
||It appears in the Statement of Financial Position.
||It appears in the Income Statement.