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What is Receipts?
Receipt refers to the income generated by business enterprise during the accounting period. It simply denotes the total cash inflows of company over a particular period of time. Receipts are just the opposite of expenses that leads to outflows of cash. Not all receipts of business directly increase the profits and decrease the loss, but some of them affect profit or loss directly. Also, without receipts, there may be no existence for business enterprise.
The receipts are classified into two types: Revenue receipt and Capital receipt, and both of these are important components of accounting. It is quite important to correctly differentiate among these two as classification of these transactions get reflected in financial statements of company. Revenue receipts are the result of routine or operating activities of business, and therefore keep occurring continuously. Whereas, capital receipts are the result of non-operating sources and do not have tendency of occurring again and again. They occur only once in final accounting year, and are mentioned specifically on liabilities side of balance sheet.
Classification of Receipts
Revenue Receipts
Revenue receipts refers to receipts of enterprise arising from its core business activities. These are simply the funds that businesses receive due to running of their primary operations, and help in raising the total revenue for company. Revenue receipts keeps on occurring again and again as are the part of day-to-day business activities. These are major source of income for every business organization and no business can survive in its absence for long. However, these receipts have little shortcomings associated with them. The benefits of these can be enjoyed only in current accounting period and not after that due to its short-term effect. Revenue receipts are recorded in Trade and Profit & Loss Account rather than in balance sheet as these are outcomes of business operating activities. In terms of government income, revenue receipts are one that do not result in claim on government. They are basically termed as non-redeemable, and classified into tax and non-tax revenues.
There are 2 conditions that need to be satisfied by revenue receipts:
- No creation of Liability- Revenue receipts does not lead to creation of any liability for government. Like for example, taxes received by government, unlike the borrowings do not create liabilities.
- No reduction in assets- It do not affect government’s assets. Revenue inflows from sale of stake in public assets can’t be disclosed as revenue receipts by government as it comes under capital receipts.
Some of the examples for revenue receipts in business organization are rent received, commission received, money received for services provided, dividend received, interest received, inflows from inventory sales, discount received from suppliers/creditors, etc.
Capital Receipts
Capital receipts are receipts received by business from non-operating activities, and appear on balance sheet rather than income statement. These payments are not income in nature but enhances the overall capital of company. Capital receipts are non-recurring, meaning they don’t occur on regular basis and can’t be utilized for profit distribution. These are the part of financing and investing activities, and either reduce assets or increase liabilities for business enterprise. Such receipts unlike the revenue receipts, cannot be utilized for funding reserves. Also, it does not impact the total profit or loss of business organization and are recorded on accrual basis, that means get recorded as soon as right of receipt is established.
There are some basic conditions that needs to be mandatorily satisfied by Capital Receipts.
- Creation of Liability- When business procure loan from bank or financial institution, then a liability is created, and therefore it is capital receipt. However, receiving of commission won’t be considered capital receipt as no liability is created.
- Reduction of company’s assets- When company sold off its shares to public, the asset will get reduced. This will result in increasing the future revenue and would be treated as capital receipt in this situation.
Few examples of capital receipts are loan taken from bank, issue of shares, issue of debt instruments like debentures, government grants, insurance claims, proceeds from disinvestment, additional capital introduced by proprietor, mobilisation of savings via KVP, NSC, etc.