Capital & Revenue Receipts (Cambridge (CIE) O Level Accounting)
Revision Note
Written by: Dan Finlay
Reviewed by: Lucy Kirkham
Capital 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
Examiner Tips and Tricks
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.
Revenue Receipts
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.
The profit for the year ended 29 February 2024 is $35 700.
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