Capital receipts definition
/What are Capital Receipts?
Capital receipts refer to incoming cash flows (receipts) originating from the sale of fixed assets, shares, or debt. These receipts are typically used to either acquire fixed assets, fund operations, pay off debts, or pay dividends to shareholders. The following points expand on these sources:
Cash from the sale of fixed assets (either tangible or intangible). It can also include a payment associated with an insurance claim from a damaged fixed asset.
Cash from the sale of shares in the business. It can include common stock and preferred stock.
Cash from the issuance of a debt instrument. It can include bonds and loans.
A capital receipt tends to be of a non-continuing nature. Thus, the sale of a fixed asset or shares in a business arises on only an occasional basis. One exception is when shares are sold on an ongoing subscription basis. Another way of looking at capital receipts is that they are not generated by the sales of goods or services in the ordinary course of business. Thus, they do not arise from the operating activities of a business.
Examples of Capital Receipts
Here are three examples of capital receipts:
Proceeds from the sale of fixed assets. When a company sells a fixed asset, such as machinery, land, or buildings, it generates a capital receipt. This transaction is not part of the company’s regular operating income but instead represents the recovery of an investment. The proceeds can be used for reinvestment in new assets or other capital expenditures.
Issuance of shares. A company raises capital receipts by issuing shares to investors in exchange for funds. This can occur through an initial public offering or subsequent stock offerings to finance business expansion or repay debt. Since share issuance represents a long-term source of funding, it does not impact the company's profit or loss directly.
Borrowings through loans or bonds. When a business raises funds by taking out a loan or issuing bonds, it receives capital receipts. These funds are typically used for large investments, such as infrastructure development or acquiring new technology. Unlike revenue income, borrowed funds must be repaid with interest over time, making them a liability rather than earnings.
Presentation of Capital Receipts
All capital receipts are recorded on the balance sheet, not the income statement. Here are several examples:
Sell a fixed asset. Debit cash (asset) account and credit fixed asset (credit) account.
Sell shares in a business. Debit cash (asset) account and credit equity account.
Issue debt. Debit cash (asset) account and credit loan (liability) account.