What are the capital receipts in Accounting

Capital Receipts-This is an important type of receipt. By this article, you are going to understand all about capital receipts such as definition, examples, identification, calculation, types, and more faqs related to capital receipt in accounting terms.

What are the Capital receipts?

The receipts which are not revenue in nature are capital receipts such as receipts from the sale of fixed assets or investments, secured or unsecured loans, owners’ contributions, etc. Because of revenue in nature, It creates the liability of the company or reduces the company’s assets. And it does not affect the Profit and Loss of the company.

What are the features of Capital Receipts?

  1. Receipts that are not revenue in nature are capital receipts
  2. Capital receipts are non-recurring in nature
  3. Funds generated from capital receipts are from non-operating activities.
  4. It either creates liability or reduces the asset.
  5. It has no impact on the income statement instead balance sheet is affected by the capital receipts.
  6. For examples-receipts from the sale of fixed assets or investments, secured or unsecured loans, owners’ contributions, etc
  7. Capital receipts are not directly credited to the Profit and Loss Account.
  8. Cannot save it for creating reserve funds
  9. The capital receipts are received in the long term
  10. Not available for distribution of profits
  11. If a receipt is preferable to a fixed asset, it is a capital receipt
  12. Profit on the sale of a motor car used in business by an assessee is a capital receipt

What are the examples of capital receipts?

These are the examples of capital receipts

  1. Receipts from the sale of fixed assets or investments,
  2. secured or unsecured loans,
  3. owners’ contributions,
  4. Membership fees receipt,
  5. Donation receipt,
  6. Debentures money,
  7. An entrance fee of 5,000 received by Ram and Shyam Social Club is a capital receipt etc.

The followings are some important examples of capital receipts decided by courts

  1. Salami or Nazrana received for grant of the permanent lease.
  2. The compensation received for loss of the right to future remuneration.
  3. The compensation received from the employer for loss of employment due to premature termination of service.
  4. Price received on sale of know-how.
  5. Damages are received by an employee who is wrongly dismissed or a payment received by an employee in lieu of notice.
  6. The amount received by the assessee for digging and removing earth from his land for brick-making.
  7. Contribution received by electric supply company from consumers for installation of service lines (excess of the amount over the cost of installation).

How do you identify capital receipts?

We can identify the capital receipt through the example-

For example-Rahul Pictures Ltd. constructs a cinema house and incurs the following expenditure during the first year ending 31st March 2022.

(1) Second-hand furniture worth 9,000 was purchased; repainting of the furniture costs 1,000. The furniture was installed by its own workmen, wages for this being 200.

(2) Expenses in connection with obtaining a license for running the cinema worth 20,000. During the course of the year, the cinema company was fined 1,000, for contravening rules. A renewal fee of 2,000 for next year is also paid.

(3) Fire insurance, 1,000 was paid on 1st October 2021 for one year.

(4) Temporary huts were constructed costing 1,200. They were necessary for the construction of the cinema. They were demolished when the cinema was ready.
Point out how you would classify the above items.

Solution

(1) The total cost of the furniture should be treated as 10,200. because all the amounts mentioned should be capitalized since without such expenditure the furniture would not be available for use. If 1,000 and 200 have been respectively debited to the Repairs Account and the Wages Account, these accounts will be credited to the Furniture Account.

(2) License for running the cinema house is necessary, hence its cost should be capitalized. But the fine of 1,000 is revenue expenditure. The renewal fee for the next year is also revenue expenditure but pertains to the next year; hence, it is a prepaid expense.

(3) Half of the insurance premium pertains to the year beginning on 1st April 2022. Hence such an amount should be treated as a prepaid expense. The remaining amount is revenue expense for the current year.

(4) Since the temporary huts were necessary for the construction, their cost should be added to the cost of the cinema hall and thus capitalized.

How do you calculate capital receipts?

you can understand how you can calculate capital receipt through the given examples

For example-1, when a fixed asset is sold for 100000 (cost 95000), the capital receipt of 100000 is not credited to the Profit and Loss Account. how Profit and Loss on the sale of fixed assets are calculated and credited to the Profit and Loss Account as follows:

Here Sale Proceeds 100000
– Cost 95000
Profit 5000

for example-2, State with reasons whether the following are capital or revenue receipts :

(a) Introduction of capital by the owner 10,00,000.

(b) Amount realized from the sale of old machinery 50,000 (book value 48,000).

(c) Sale of goods for cash 10,000.

(d) Cash received from debtors 20,000.

(e) Sale of investments for 40,000 (book value 44,000).

(f) Interest received on investments 3,000.

Solution:

(a) Introduction of capital by the owner 10,00,000 is a capital receipt as it creates a claim on the business to repay it.

(b) Amount realized from the sale of old machinery: 50,000 is a capital receipt. Capital profit on the sale of 2,000 is to be shown in the Profit and Loss Account.

(c) Sale proceeds from the sale of goods 10,000 is a revenue receipt as it is a receipt in the course of normal business activities of the enterprise.

(d) Cash received from debtors 20,000 is a revenue receipt as this is in the course of normal business activities of the enterprise.

(e) Sale proceeds from investments of 40,000 is a capital receipt and capital loss of 4,000 is to charge in the Profit and Loss Account.

(f) Interest on investments of 3,000 is a revenue receipt as the use of enterprise resources yielding interest is revenue.

What are the types of capital receipts?

There are two types of Capital receipts-

  1. Debt capital receipts– Debt Receipts have to be repaid by the government. Around 25 percent of government expenditure is financed through borrowing. A reduction in debt receipt (or borrowing) can be a big leap for the economy’s financial health. Most of the capital receipts of the government are debt receipts. Examples of debt capital receipts: Market loans, issuance of special securities to public-sector banks, issue of securities, short-term borrowings, treasury bills, securities against small savings, state provident funds, relief bonds, saving bonds, gold bonds, external debt, etc, are all example of debt capital receipts.
  1. Non-debt capital receipts– non-debt receipts are those which do not incur any future repayment burden for the government. Almost 75 percent of the total budget receipts are non-debt receipts. Examples of non-debt capital receipts: Recovery of loans and advances, disinvestment, issue of bonus shares, etc

How capital receipt is different from revenue receipt?

You can know how it is different from revenue receipt throughout the given table

NoCapital ReceiptsRevenue Receipts
1Receipts that are not revenue in nature are capital receiptsReceipts that are obtained in course of normal business activities are revenue receipts
2For examples-receipts from the sale of fixed assets or investments, secured or unsecured loans, owners’ contributions, etc.For example-receipts from the sale of goods or services, interest income, etc.
3Capital receipts are not directly credited to the Profit and Loss Account.Revenue receipts are credited to the Profit and Loss Account.
4Cannot save it for creating reserve fundsCan be saved for creating reserve funds
5Not available for distribution of profitsAvailable for distribution of profits
6If a receipt is referable to a fixed asset, it is a capital receiptif it is referable to circulating asset it is revenue receipt.
7Profit on the sale of a motor car used in business by an assessee is a capital receiptthe profit earned by an automobile dealer, dealing in cars, by selling a car is his revenue receipt.
8The capital receipts are received in the long termAnd the revenue receipts are received in the short term

Are Capital receipts taxable?

According to CA from Caclubindia dot com, Capital Receipts are specifically included under section 2(24) At present, the following capital receipts have been specifically included in the definition of “Income”:

(a) Income by way of capital gains [Section 45]
(b) Any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy will constitute income.
(c) Compensation on termination of employment or modification of terms of employment.
(d) Compensation or other payment due to or received by some specified person covered under section 28(ii) of the Act
(e) Any sum whether received or receivable in cash or in-kind under an agreement for not carrying out any activity in relation to a business or not sharing any know-how, patent, copyright, trademark, license, etc. [Section 28(va)]
(f) Any consideration received for the issue of shares exceeds the fair market value of the shares [section 56(2)(viib)].
(g) Any sum of money received as advance, if such sum is forfeited consequent to failure of negotiation for transfer of a capital asset [section 56(2)(ix)].
(h) Any sum of money or value of property received without consideration or for inadequate consideration by any person [section 56(2)(x)].

faqs on Capital Receipt

What is the definition of capital receipt?

Capital receipts refer to incoming cash flows (receipts) originating from the sale of fixed assets, shares, or debt. The following points expand on these sources:

  1. Cash from the sale of fixed assets (either tangible or intangible). It can also include a payment associated with an insurance claim from a damaged fixed asset.
  2. Cash from the sale of shares in the business. It can include common stock and preferred stock.
  3. And cash from the issuance of a debt instrument. It can include bonds and loans.

What is capital receipt as per income tax?

Capital receipts are receipts that create liabilities or reduce financial assets. They also refer to incoming cash flows. Capital receipts can be both non-debt and Debt receipts. Loans from the general public, foreign governments, and the Reserve Bank of India (RBI) form a crucial part of capital receipts.

Capital receipts are loans taken by the government from the public, borrowings from foreign countries and institutes, and borrowings from the RBI. Recovery of loans given by the Centre to states and others is also included in capital receipts. In the balance sheet, capital receipts are mentioned in the liabilities section. The capital receipt has a nature of non-recurrence.

Which receipts are called capital receipts?

These are the capital receipts in nature

  1. Insurance claim received on account of machinery damaged by fire.
  2. Receipts from the sale of fixed assets or investments,
  3. secured or unsecured loans,
  4. owners’ contributions,
  5. Membership fees receipt,
  6. Donation receipt,
  7. Debentures money,
  8. An entrance fee of 5,000 received by Ram and Shyam Social Club is a capital receipt etc.

Which one is a capital receipt?

  1. 10,000 spent as traveling expenses of the directors on trips abroad for the purchase of capital assets.
  2. Amount received from Trade receivables during the year.
  3. Amount spent on the demolition of building to construct a bigger building on the same site.
  4. Insurance claim received on account of machinery damaged by fire.

Answers are

  1. Capital expenditure.
  2. Revenue receipt.
  3. Capital expenditure.
  4. Capital receipt.

Find the nature of the Receipt

Q1-Entrance fee of 3,000 received by Ram and Shyam Social Club is
(a) Capital receipt
(b) Revenue receipt
(c) Capital expenditures

Ans. (a) Capital receipt

Q2-Insurance claim received on account of
(a) Capital receipt
(b) Revenue receipt
(c) Capital expenditures

Ans. (a) Capital receipt

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