Capital & Revenue Receipts (Cambridge International IGCSE Accounting)

Capital & revenue receipts

What are capital receipts?

• A capital receipt is money that is received from activity which is not part of a business' day-to-day trading

  • These are one-off receipts of money

• Capital receipts include:

  • Capital introduced to the business by the owner(s)
  • Money received from a loan
  • The proceeds from the sale of a non-current asset

• Capital receipts affect the statement of financial position

  • They could affect the non-current assets

    • The sale of a non-current asset reduces the value of these assets

  • They could affect the current assets

    • Money in the bank could increase

  • They could affect the non-current liabilities

    • Taking out a bank loan increases the amount owed

  • They could affect the capital

    • If capital is introduced into the business, the value of capital increases

• Capital receipts are not included in the income statement

Exam Hint The total proceeds from the sale of a non-current asset do not appear on the income statement. However, an amount for the profit or loss from the sale does appear on the income statement as an income (profit) or an expense (loss). The profit or loss is calculated using the current net book value of the asset, not the original cost.

What are revenue receipts?

• A revenue receipt is money that is received from the day-to-day trading of the business

  • These are regular receipts of money

• Revenue receipts include:

  • The sale of goods
  • Commission received
  • Rent received
  • Interest received

• Revenue receipts are included in the income statement

  • They are not included in the statement of financial position

• However, they will contribute to the profit or loss for the year, which is reported in the statement of financial position

Effects of incorrect treatment of receipts

What are the effects of treating capital receipts as revenue receipts?

• Incorrectly treating capital receipts as revenue receipts will affect the financial statements

• Their full value will incorrectly appear as income on the income statement

  • The income will therefore be overstated
  • This means the profit for the year will be overstated

What are the effects of treating revenue receipts as capital receipts?

• Incorrectly treating revenue receipts as capital receipts will affect the financial statements

• They will not appear on the income statement

  • The income will therefore be understated
  • This means the profit for the year will be understated

Worked Example Makkari’s draft income statement for the year ended 29 February 2024 stated a profit of $45 700. Makkari took out a bank loan for $10 000 on 5 January 2024. However, this was incorrectly treated as a revenue receipt.

Calculate the correct profit for the year ended 29 February 2024.

Answer:

The money received from the bank loan was incorrectly included as an income on the income statement. This is a capital receipt and therefore it should not appear on the income statement. The income on the income statement needs to be reduced by $10 000.

Final answer: The profit for the year ended 29 February 2024 is $35 700