a)Capital receipts and revenue receipts

Receipts refer to amounts received by a business i.e., cash inflows. Receipts may be classified as Capital Receipts and Revenue Receipts. It is necessary to note this distinction clearly because only the revenue receipts are taken to the Profit and Loss Account and not the capital receipts.

Capital Receipts:

Capital receipts are the amounts received in the form of (a) additional capital introduced in the business, (b) loans received, and (c) sale proceeds of fixed assets. You are aware that a loan taken by the business is repayable sooner or later. Similarly, additional capital received represents an increase in the proprietor's claim over the business assets. Thus these two items represent increase in liabilities of the business and obviously are not incomes or, revenues. These are capital receipts and should be treated as such. The sale proceeds of a fixed asset are also treated as a capital receipt because the amount received is not revenue earned in the normal course of business. The capital receipts increase the liabilities or reduce the assets. They do not affect the profit or loss

Revenue Receipts:

Revenue receipts are the amounts received in the normal and regular course of business. They take the form of (a) sale proceeds of goods, and (b) incomes such as interest earned, commission earned, rent received, etc. These receipts are on account of goods sold or some services rendered by the business and as such they are not repayable. All revenue receipts are treated as incomes and shown on the credit side of the Profit and Loss Account.

b)Capital profits and revenue profits

Revenue profits are those profits that are earned in the normal and ordinary course of business i.e., through regular sales of goods or by way of income from investments. Capital profits, on the other hand, are those profits which are not earned in the course of regular trading. Such profits arise as a result of (i) selling some fixed assets at a profit or (ii) share issued at a premium. The revenue profits are credited to Profit and Loss Account whereas the capital profits are transferred to capital reserve and shown in the Balance Sheet.

c)Capital losses and revenue losses

Revenue losses are those losses that arise during the normal course of business. The capital losses are losses which arise on account of the sale of some fixed assets or on issue of shares at a discount. Capital losses are not shown in the Profit and Loss Account. They are generally set off against capital profits. However, if the amount of capital loss is heavy and capital profits are not available for writing it off, the same is spread over a number of years. It will be written off in instalments.

The purpose sf this discussion is to highlight the importance of the distinction between capital and revenue items. Note that all revenue items are taken to the Profit and Loss. Account to determine the trading result while the capital items are shown in the Balance Sheet to assess the financial position of the business.