Receipts can be classified into two categories: Capital Receipts, and Revenue Receipts

(I) Capital receipts. Capital Receipts consist ofadditioiial payments made to the business either by shareholders of the company or by the proprietors ofthe business or receipts from sale of fixed assets ofa business. For example, the amount raised by the company by way of share capital isa capital receipt. Similarly, ifa flirn sells its machinery for a sum ofRs 10,000, the receipt is a capital receipt.

It should be noted that a capital receipt is different from a capital profit. Receipt denotes receiving payment in cash. Moreover, the whole of it may or may not be a capital profit. There maybe a capital loss too. For example, ifa plant costing Rs 10,000 is sold for Rs 12,000, there is a capital receipt ofRs 12,000, but there will be a capital profit of only Rs 2,000. Similarly, if the same plant had been sold only for Rs 8,000, there is a capital receipt ofRs 8,000 but there is a capital loss ofRs 2,000.

(ii) Revenue receipts. Any receipt which is not a capital receipt is a revenue receipt. In business most ofthe receipts are revenue receipts. However, a revenue receipt is also different from-n revenue profit or revenue income. Receipt denotes receiving of payment in cash. Moreover, the entire amount ofreceiptmay or may not be a revenue income. For example, if the goods costing Rs 20,000 are sold for Rs 25,000, there is a revenue receipt ofRs 25,000, hut revenue profit or income is only ofRs 5,000.

The distinction between capital and revenue is important both for income determination and taxation purposes. Various tçsts have been laid down from time to time for distinguishing between these two. Some ofthese are based on, economic considerations, some on accounting principles and some have been pronounced by the courts. However, difficulties still arise in making a clear cut distinction between these two. There have been cases which fall on the border line. In many cases, the policies ofthose incharge ofthe business will decide whether certain expenditure or income should be classified revenue or capital. However, the rules given in the preceding pages and the illustrations given in the following pages will to a great extent help a student in making a fairly reasonable distinction between capital and revenue.

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