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Capital receipt

Capital receipts refer to those receipts which arise from sale of capital asset. The amount received from the proprietors as capital or loan is treated as capital receipts. It is an item of the Balance Sheet and not of Profit and Loss account.


Example: Receipt on sale of fixed asset, security premium received etc.

Revenue Receipt

Receipts which are obtained in the course of normal business activities are known as revenue receipts. Total receipt is not necessarily an revenue. Revenue receipts are credited to Trading/Profit and Loss account.


Example: Sale of goods, interest received, and commission received etc.


Illustration 1

State whether the following are capital, revenue or deferred revenue expenditure/loss/receipt along with the reasons.

  1. Expenses incurred for obtaining a license to start any industry
  2. Some important parts of the machinery have been changed for the reduction of cost and to get better efficiency
  3. Amount spent to defend a suit claiming (lawyer’s fees) that the firm’s factory site belonged to the plaintiff’s land
  4. Incurred heavy advertising expenditure to introduce a new product
  5. An amount of ₹3,500 paid as deposit for obtaining a telephone for the new business
  6. Wages of ₹10,000 has been incurred for installing new machinery
  7. An old machinery costing ₹ 2,500 has been sold for ₹ 2,000. New machinery is purchased for ₹5,000
  8. Amount received from a debtor whose account was previously written off as bad debt
  9. Loss of ₹ 3,000 due to devaluation of currency on loan taken in foreign currency
  10. Cost of ₹ 8,000 incurred to submit a project report (The project did not materialize)


  1. Capital expenditure, because it is in the nature of enduring the business. This is an item of expenditure incurred to acquire the right to carry on business. Hence, it has to be capitalized. Whether payment is made in instalments or in a lump sum, the nature of expenditure will not change.
  2. Capital expenditure, because it results in increasing the efficiency of the machinery and also reducing the cost of the product.
  3. Revenue expenditure, because through this expenditure, neither any endurable benefit can be obtained in the future nor will the capacity of the asset be increased and the expense here is related to defending a claim that the firm’s factory site belongs to the plaintiff, which is a part of the maintenance cost. (Maintenance cost in relation to an asset is revenue expenditure).
  4. Deferred revenue expenditure, because this expenditure is heavy, but not of a capital nature and moreover, it will not help to create any new asset. But since the benefit of the expense will be available for a number of years, the expenditure should be spread over the periods in which its effect would remain.
  5. It is not at an expense, it’s a deposit and it is treated as an asset and the same is adjusted over a period of time against the telephone bills.
  6. Capital expenditure, because it is in the nature of enduring the business by putting the machinery in working condition.
  7. This transaction involves aspects of capital expenditure and capital loss. There is a loss of ₹ 500 on sale. It is regarded as a capital loss. And ₹ 5,000, is considered as a capital expenditure, because it is in the nature of enduring the business.
  8. This is an example of revenue receipt, because this amount is not refundable to the customer and the amount was previously written off as a loss.
  9. This transaction is involved with either, a capital or a revenue loss. If the loan was used for circulating capital or trading asset, such loss will be treated as a revenue loss. If the loan was used for acquiring a capital asset, such loss arising on account of devaluation of the currency will be treated as a capital loss.
  10. Revenue expenditure, because it is an enduring nature of a business. However, if the amount is heavy, it will be treated as deferred revenue expenditure.

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