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CAPITAL RECEIPT

Table of Contents

MEANING

Capital receipt is the amount received by the enterprise which is not revenue in nature and leads to an overall increase in the total capital or equity of the company. These generate out of the non-operating activities. It means these receipts do not arise out of the normal course of business.

FEATURES OF CAPITAL RECEIPTS

NATURE: These receipts are non-recurring in nature which means it does not arise out of the normal course of business.

RECORDING: The capital receipts being the non-reccuring in nature is not shown in the Income Statement i.e. Profit and Loss account. The capital receipt is shown in Balance Sheet or Position Statement.

USE FOR DISTRIBUTION AS PROFITS: These are the receipts which are non-recurring in the nature. That is why the amount received against these receipts are not available for distribution as profits.

CREATION OF RESERVE FUND: These receipts are not used to create reserve funds.

AMOUNT: Large amount of funds are involved.

RECEIVED IN EXCHANGE OF: These receipts are received in exchange of source of income. Example: Sale of plant and machinery results in capital receipt.

MATCHING: The capital receipts are not matched against the capital expenditure.

CONDITIONS OF RECEIPT TO BE CAPITAL RECEIPT: There are two conditions to be fulfilled by a receipt to be called as Capital receipt:

The receipt must leads to increase in the liability.

Example: Borrowing of loan of ₹2,00,000 from the bank. The ₹2,00,000 is a capital receipt as it has lead to increase in the liability of the business.

The receipt must cause a decrease in the asset.

Example: Sale of land for ₹10,00,000. The sale of land generate the revenue of ₹10,00,000 which is a capital receipt as it has lead to the decrease in the asset.  

EXAMPLES

  • Amount received from sale of fixed assets or investments.
  • Capital contributed by the proprietors, partners or money obtained from issue of shares and debentures in case of company.
  • Amount received by way of loans.
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