Capital Receipts | Meaning, Types, Components, and Accounting Treatment

What are Capital Receipts?

A capital receipt can be defined as one that either raises a liability or decreases an asset. For instance, the amount received in the way of additional capital, the amount generated with loans, or the amount generated from the sale of fixed assets.

Key points to remember:

• A bank loan is a capital receipt because it raises a liability. Similarly, receipts from the sale of machinery are also capital receipts because they decrease an asset.
• Capital Receipts either raise liabilities or decrease assets. It implies that capital receipts have no effect on the company’s profit or loss and are recorded on the balance sheet.

Types of Capital Receipts

There are two main types of Capital Receipts; namely, Non-debt Capital Receipts and Debt Capital Receipts.

1. Non-debt Capital Receipts: The receipts that do not create any liability on the balance sheet of an organisation are known as Non-Debt Capital Receipts. These receipts usually arise because of the transactions that increase the capital or net worth of the organisation. For example, grants received, sale of fixed assets, investments made by the organisation that is sold at a later date, etc.

2. Debt Capital Receipts: The receipts that create liability on the balance sheet of an organisation are known as Debt Capital Receipts. These receipts represent the money borrowed by the organisation that the organisation needs to pay back at some point in the future. For example, money borrowed through loans or issue of bonds, etc. Whenever an organisation borrows money, it receives cash in a lump sum which it can use for capital expenditures or other investments. However, it also creates an obligation for the organisation to repay the borrowed amount with interest, and this amount is recorded as a liability in the company’s balance sheet. 

Both these receipts are essential for the proper financial management of a company. These receipts can provide the organisation with the required funds for investments, capital expenditures, and other activities that can help the organisation grow. However, it is necessary to carefully manage the debt levels of the organisation and always ensure to have a plan for paying back the borrowed money.

Components of Capital Receipts

The components of capital receipts can vary based on the type of organisation and its nature of operations. Some of the common components are as follows:

1. Sale of Fixed Assets: It is the amount of cash received by an organisation from the sale of its non-current assets like machinery, equipment, land, building, etc.

2. Grants: It is the amount of cash received by an organisation from government bodies or other organisations for some particular purposes, including infrastructure development, R&D, social welfare programs, etc.

3. Borrowings: It is the amount of cash received by an organisation through bonds or loans. The amount borrowed by the organisation is recorded in its balance sheet as a liability, and the interest paid on this amount is recorded as an expense of the organisation.

4. Investments: It is the amount of cash received by an organisation by selling its investments like bonds, stocks, mutual funds, etc.

5. Disinvestment: It is the amount of cash received by an organisation from the sale of its equity holdings in a public sector enterprise.

6. Miscellaneous Capital Receipts: It includes the amount of cash received by an organisation from any other source that is not mentioned above, such as proceeds from the sale of copyrights, patents, goodwill, etc.

 How do you calculate Capital Receipts?

In order to calculate capital receipts, firslty, determine the sources of capital inflows and then use the appropriate formula. For example, to calculate the capital receipts for non-current assets, deduct any transation cost from the sale proceeds of the non-current asset, and the resultant amount will be the capital receipt.

Accounting Treatment of Capital Receipts

As capital receipts do not have an impact on the profit or loss of the company, and either increase liability or reduce its assets, they are shown in the Balance Sheet.

Illustration:

Determine which of the following is a Capital Receipt:

1. Corporate Tax.

2. Loan taken for ₹5,000.

3. Receipt from the sale of shares.

4. Dividend paid to shareholders.

5. Capital invested by the owner of the company.

Solution:

1. Corporate Tax is not a Capital Receipt because it does not either create liability or reduce the assets of the firm.

2. Loan taken of ₹5,000 is a Capital Receipt because it creates liability for the company. It will be shown on the Liabilities side of the Balance Sheet.

3. Receipt from the sale of shares is a Capital Receipt because it reduces the assets of the company. The equity account will be credited with the receipt amount on the Liabilities side of the Balance Sheet.

4. Dividend paid to shareholders is not a Capital Receipt because it does not create liability for the company.

5. Capital invested by the owner of the company is a Capital Receipt because it increases the liability of the company. It will be shown on the Liability side of the Balance Sheet.