Difference between Capital Receipt and Revenue Receipt

In the government budget, receipts refers to the money received by the government. These receipts can be broadly classified into Capital Receipts and Revenue Receipts based on their nature and impact on government finances. The Difference between Capital Receipt and Revenue Receipt has been discussed below in detail in the article.

Difference Between Capital Receipts and Revenue Receipts

Capital receipts and revenue receipts are two different types of income received by a government or a business. They serve different purposes and affect financial accounts in different ways. The key differences between capital receipts and revenue receipts are discussed below:

Capital Receipt and Revenue Receipt

Capital receipts and revenue receipts are two types of income received by the government or a business. They are different in their nature, purpose, and effect on financial accounts. To understand public finance and budgeting clearly, their details are explained below:

Capital Receipt

• Capital receipts are the money received by the government or a company from sources that have long-term effects on its finances.
• These are not earned from regular or day-to-day activities. They are received occasionally.
• They mainly arise from selling assets such as land, buildings, investments or from borrowing money, which creates a liability.
• Since they are usually non-recurring, they cannot be treated as a regular source of income.
• Capital receipts affect the assets or liabilities of the government and are recorded in the Balance Sheet, not in the income or profit statement.
• Examples: borrowings, disinvestment proceeds and recovery of loans by the government.

Purpose of Capital Receipts

• Capital receipts are mainly used to strengthen the financial position of the government or a company.
• It helps in raising large funds for long-term purposes like building infrastructure, buying assets or expanding business activities.
• These funds can also be used to repay old debts and reduce financial burden.
• In India, the government sets disinvestment targets every year to earn capital receipts and manage the fiscal deficit.

Capital Receipts from Debt (Borrowings)

• These receipts create a liability, meaning the amount has to be repaid in the future.
• Loans – When money is borrowed from banks or financial institutions.
• Bonds – Money raised from the public by promising repayment with interest.
• Debentures – Long-term borrowing instruments issued at a fixed interest rate.

Capital Receipts not from Debt

• Sale of Fixed Assets- When a company or government sells long-term assets like land, buildings or machinery that are no longer required, the money received is treated as a capital receipt. This increases cash but reduces the value of assets in the balance sheet.
• Issue of Equity Shares- When a company raises money by selling shares to investors, it receives capital funds. This does not create a repayment burden like a loan, but it increases the company’s share capital.
• Government Grants- If a company receives financial assistance from the government for specific long-term purposes such as research, development or expansion, it is treated as a capital receipt.

Advantages of Capital Receipts

• Capital receipts provide large funds for long-term development and investment purposes.
• They give financial flexibility, as the money can be used to repay debts or invest in infrastructure and new projects.
• Sale of unused or non-essential assets helps in better utilisation of resources.
• They help in reducing liabilities when the funds are used to repay old loans, improving financial stability.
• Capital receipts improve the cash position and balance sheet of the government or company.
• They support economic growth by financing major projects like roads, railways and public infrastructure.

Revenue Receipt

• Revenue receipts are the money received by the government or a company from its regular day-to-day activities.
• These receipts come from activities like sale of goods, providing services, taxes, fees, interest, etc.
• They are recurring in nature, which means they are received regularly every year.
• Revenue receipts do not create any liability (no repayment obligation) and do not reduce assets of the government or company.
• They are shown in the Income Statement or Revenue Account, not in the Balance Sheet.
• In the case of the Government of India, examples include tax revenue (Income Tax, GST, Customs Duty) and non-tax revenue (interest receipts, dividends from PSUs, fees and fines).

Purpose of Revenue Receipts

• Revenue receipts are the main source of regular income for the government or a company.
• They help in running daily activities smoothly and meeting routine expenses like salaries, pensions, subsidies and maintenance costs.
• When businesses earn revenue from selling goods and services, they can expand production, improve quality and create more jobs.
• When the government collects revenue through taxes and other sources, it can spend more on public services such as education, healthcare, infrastructure and welfare schemes.
• Revenue receipts do not create any repayment burden and do not require selling assets.
• Since they are received regularly, they provide financial stability and support economic growth.

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Similarity Between Capital Receipts and Revenue Receipts

• Both are sources of income for the government or a company.
• Both result in an inflow of cash or funds.
• Both are recorded in the accounting books and reflected in financial statements.
• Both help in assessing the financial health and stability of the government or organisation.
• Funds received from both can be used for development, growth and achieving economic objectives.
• Both arise from financial transactions between economic entities.