Distinction between Capital Receipt and Revenue Receipts

There are two different types of receipts that a business or a government generates during its financial activities. They are called capital receipts and revenue receipts.

Capital receipts are funds that a company, organization, or government receives from non-operational sources, such as the sale of assets, borrowing, or equity investments. They are typically non-recurring transactions that are used for financing long-term expenditures or debt repayments.  As capital receipts are the result of transactions of assets and liabilities, they are part of the balance sheet. Unlike revenue receipts, they are not reflected in the income or profit-and-loss statement. Capital receipts decrease the value of assets or increase the value of liability.

Here are some examples of capital receipts:

1. Sale of Assets: Selling assets like the sale of property, land, buildings, machinery, inventory, patents, copyrights, goodwill, and other fixed assets, etc. are capital receipts. It can also include the selling of bonus shares.
2. Disinvestment of Government assets: Disinvestment is the process of selling government assets to raise money or reduce the government’s financial burden. It can also help to improve public finances, introduce fair market competition, and encourage private ownership. The disinvestment of Public sector undertakings (PSU) is an example of the disinvestment of government assets.
3. Selling Shares to the Public and Shareholders: The primary market is used by issuers for raising fresh capital from the investors by making initial public offers or rights issues or offers for the sale of equity or debt. A corporate may raise capital in the primary market by way of an initial public offer, rights issue, or private placement. An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. It is the largest source of funds with long or indefinite maturity for the company. A Follow-on Public Offer (FPO) is when a company that is already listed on a stock exchange issues additional shares of its stock to the public. A rights issue is when a company invites its current shareholders to buy more shares at a discount. Shareholders get the right to purchase these new shares at a lower price than the market rate, which helps the company raise more money without bringing in new outside investors. The money raised by all the above methods is considered capital receipts.
4. Forfeited Shares: When a company forfeits partially paid shares, the company reclaims the shares and the shareholder loses all rights and benefits associated with them. The company also forfeits the money received on the shares up to the date of forfeiture. The additional amount received can be added to the company’s reserves and surplus.
5. Addition of new business partner: Receiving cash investment from a new business partner is part of the owner’s equity; therefore it is also a capital receipt.
6. Loan: Companies take loans from a bank or financial institution to finance a new project or business endeavour. Money received by way of a loan is also a capital receipt as it is recorded as inflows in the company’s cash account. When the interest is paid for these borrowings, it will be registered as an expense. Thus borrowings create a debt-oriented capital receipt.
7. Issuing Debentures and Other Debt Instruments: Government entities and companies often issue debt instruments in the form of bonds and debentures. They practically act like a loan and help finance a company or government’s activities.
8. Small Savings Scheme: Small saving instruments like Post Office Time Deposits PPF, NSC, SCSS, KVP, and Sukanya Samriddhi Scheme are types of Government of India borrowing from the public. Funds raised from small savings instruments (SSIs) in India are used by the central government to finance its fiscal deficit. When the interest is paid for these borrowings, it will be registered as an expense. Thus borrowings create a debt-oriented capital receipt.
9. Insurance Claims: A company’s claim for damages on the loss of inventory, equipment or hardware on account of fire or any other damages to assets covered by the insurance plan, when settled by the Insurance company, it will be categorised as a capital receipt because it entails cash inflows.
10. Government Grants: Non-repayable funds provided by the government for specific projects or purposes, such as infrastructure development or research and development activities are capital receipts.

What is a Revenue Receipt?

Revenue receipts can be defined as those receipts that neither create any liability nor cause any reduction in the assets of the government or a company.

Sources of revenue receipts to the Governments:

1. Tax Revenue: Tax revenue is the core source of government revenue. It includes both direct and indirect taxes. The direct tax includes income tax, corporate tax, estate tax, capital gain tax, etc. while indirect tax includes Goods and Services Tax (GST), Cess, Custom duty, etc.
2. Non-Tax Revenue:
3. Interest:  The government earns interest on loans it makes, to state governments, union territories, foreign countries, and so on). Interest income from these loans is non-tax revenue to the Government.
4. Profits and dividends:  The government receives profits and dividends from public sector undertakings (PSUs) as non-tax revenue. These funds are a direct income for the government and belong to the capital budget.
5. Fees: It refers to fees levied by the government to cover the expense of recurring government services. There are many fees payable to the Government of India, including, Driving license fees, Company Registration fees, RTI Act fees, Court fees, Counsel Fees, Retainer fees, etc.
6. Fines and penalties:   Fines and penalties denote payments that are imposed on people for breaking the law. For example, a fee for failing to obey a traffic signal or a penalty for failing to pay taxes such as income tax or customs charges.
7. Grants:   Grants from foreign governments and international organizations are received by the government. Such grants are not a consistent source of income and are typically given in response to a disaster such as a war or a flood.

Sources of revenue receipts of a company:

Revenue receipts are the income of a business through its regular operational activities. Revenue Receipts are generated primarily from the sale of products and services. These receipts are recurring in nature and directly affect the profit and loss of the business. They are included in a company’s income statement.

Revenue receipts do not affect the liabilities or assets of a company. The profit after tax (PAT) and dividend payments derived from revenue receipts are used to create a reserve fund of a company.

Examples of Revenue Receipts of a company are receipts from the sale of goods and services, discounts received from creditors or suppliers, interests earned, dividends received, rent received, commission received, bad debts recovered, income from other sources, etc.