Accountancy · Ch 6 — Financial Statements - I
Receipts
Receipts
Receipts: Capital vs. Revenue
The same logic that applies to expenditures applies to receipts. The key question is: does the receipt create an obligation to return the money? If yes, it is a capital receipt. If no, it is a revenue receipt.
Capital Receipts
A receipt is capital when it either:
- Creates an obligation to repay the money, or
- Results from the sale of a fixed asset.
Examples of capital receipts:
-
Additional capital brought in by the owner. The business now owes this amount to the owner (it becomes part of equity). The journal entry is:
- Debit: Cash/Bank A/c
- Credit: Capital A/c
-
Loan taken from a bank. The business must repay this amount to the outsider (it becomes a liability). The journal entry is:
- Debit: Cash/Bank A/c
- Credit: Bank Loan A/c
-
Sale of a fixed asset, such as old machinery or furniture. The asset is no longer owned by the business, and the receipt is not expected to recur regularly. The journal entry is:
- Debit: Cash/Bank A/c
- Credit: Fixed Asset A/c (e.g., Machinery A/c)
Both additional capital and a bank loan are capital receipts because they create obligations — the first to the owner (equity) and the second to outsiders (liabilities). The sale of a fixed asset is also a capital receipt because it involves disposing of a long-term asset, not the regular trading activity of the business.
Revenue Receipts
A receipt is revenue when it does not create an obligation to return the money and is not from the sale of a fixed asset. Revenue receipts arise from the normal, day-to-day operations of the business.
Examples of revenue receipts:
-
Sales made by the firm. This is the primary revenue from trading goods. The journal entry is:
- Debit: Cash/Bank A/c (or Debtors A/c if on credit)
- Credit: Sales A/c
-
Interest on investment received by the firm. This is income earned from assets held by the business. The journal entry is: …