According to Paton and Littleon, "Revenue is the product of
the entity which refers to the goods and services created during a specific time
span by an enterprise."
According to American Accounting Association, Committee
on Accounting Concepts and Standards, "Revenue is the monetary expression of the
aggregate of products or services, transferred by an enterprise to its customers
during a period of time."
Capital receipts of business comprise of capital contributed
by partner or by the shareholders; loans ; sale proceeds of any fixed
asset, etc. In case of clubs and associations, receipts on account of life
subscriptions; entry fee; government grants; legacies and endowments are capital
receipts. Revenue receipts of a business are, cash from sales, discount
received, commission, interest on investment etc. In case of club etc. annual
subscriptions; sale of golf clubs and balls; receipts arising out of the
premises being given to others for use on charges.
Revenue receipts are treated in the revenue account
(trading and profit and loss account) while the capital receipts are treated in
the balance sheet.
Whether a particular receipt is capital or revenue? The
following guidelines may be stated:
- Nature of receipts is to be determined by its character
in the hands of the person receiving it not by the source from which payment was
made e.g., Payment of interest out of capital, by a company still under
construction is capital expenditure for the company but revenue receipt in the
hands of the person receiving it.
- In case of a single transaction of purchase and sale of
property the motive of the owner will decide whether the receipt is capital or
revenue e.g., A sells shares held by him as investment, it is a capital receipt
but if A sells the shares with speculative motive it would be a revenue receipt.
- A receipt on account of fixed asset is a capital
receipt while a receipt on account of current asset is a revenue receipt, e.g.,
sale proceeds of building, plant etc., constitute capital receipt while sale of
stock-in-trade is revenue receipt.
- Where a receipt is in substitution of a source of
income it is a capital receipt: but if it is' in substitution of income alone,
it is a revenue receipt e.g. if a railway passenger meets with an accident and
dies or is permanently disabled, the compensation received from the railway
company is capital receipt because this receipt is in substitution of source of
income i.e. his life but if he is rendered only temporarily disabled the receipt
will be revenue one, as it is in substitution of income alone i.e. loss of
earnings during the period of disablement.
Where a sum is received for the surrender of certain
right, it is capital receipt but where the sum received is in the nature of
compensation for loss of future profits it is a revenue receipt e.g., A, the
lease holder of fire-clay field and manufacturer of fire-clay goods, was
prevented by the railway company for working on the field adjacent to the
railway lines. Amount paid by the railway company to A is capital receipt,
because it is the receipt in lieu of his right to work upon the clay field.
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