What are Capital Receipts?
Capital receipts are the amount of cash receives from a company’s financing and investing activities. Capital receipts are not related to the business operation. They are the source of funds that company can get from issuing share capital, debt instrument, or selling investment assets.
In the statement of cash flow, company generates cash from three activities which are operating, financing, and investing. Operating activity is the main purpose of the business. The company generates most of the cash from the sale of goods or services which is the main business operation.
Besides operating activity, company also generates cash from investing and financing activity. Investing refer to the capital that company uses to purchase investment such as fixed assets, bonds in other entities, share, and so on. These types of investments will generate a return and capital gain over time. When company sells the investment, it will receive cash inflow.
Moreover, financing is the act of borrowing money from other entities by loan or issuing debt security. When the company successfully borrows money from a creditor, cash will flow into the company.
These are the money received outside the business operation, so they will not be present in the company income statement. They will show in the balance sheet as the increase of cash and increase of debt or equity. However, capital receipts will be shown in the statement of cash flow under the investing and financing activities.
They are non-recurring transactions, we cannot predict how often they are going to happen. They will incur at the right moment when the company really needs the money to make the investment.
Source of Capital Receipts:
- Cash receipt from the sale of Investment: The company can get money by selling their investment in other companies such as bonds or shares. It also includes the company’s fixed assets such as buildings, land, and so on. The transaction will increase cash and decrease assets.
- Cash receipt from Sell of Equity: The company can receive money from selling its own equity. It means we sell the ownership of the company to the new shareholders. It is simply the act of issuing new share capital to the market. The transactions will increase cash and share equity which can be common or preferred stock.
- Cash receipt from an issue of Debt: Besides issuing new shares, the company issues debt instruments such as bonds. It means the company borrows cash from the investors. So it will increase cash balance and bonds which are the long-term liabilities.
Capital Receipts Journal Entry
When the company receives cash flow from the sale of the investment, we need to record cash and the decrease in investment.
The journal entry is debiting cash and credit investment.
| Accounts | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Investment | 000 |
The transaction will increase cash on hand or cash at bank. The investment will be decreased from balance sheet. The investment may be different depending on the type of assets such as investment property, other company bonds or stock, and so on.
If the capital receipt from the issuance of debt, company will record cash and liability which depend on the type of debt.
The journal entry is about debiting cash and credit debt.
| Accounts | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Debt | 000 |
It will increase the cash balance and debt on the balance sheet. The debt can be bonds, loans, and so on.
If the company raises capital from issuing equity to the market, we need to record cash and equity.
The journal entry is debiting cash and credit equity.
| Accounts | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Equity | 000 |
The equity balance includes common stock, paid-in capital, and other accounts which depend on the equity type. To understand more please refer to the following article.
Example of Capital Receipts
ABC is a trading company that operates in the united state. During the year, the company has made the following transaction:
- Receive 5 million from the sale of goods
- Issue bond for 10 million
- Sale a building for 5 million
- And receive 1 million from interest income
Please calculate the capital receipts.
The capital receipt includes cash from issue debt and the sale of building as they meet the definition of capital receipt.
- Cash received from the sale of goods is not considered a capital receipt but cash from business operation.
- Company issue bonds for 10 million: it is the capital receipt as it increases the debt and cash.
- Sale of the building is also the capital receipt as the company sells the investment for cash.
- Interest received is not the capital, it is the return from any investment.
Capital receipts = 10 million + 5 million = 15 millions
Capital Receipts Vs Revenue Receipts
| Capital Receipts | Revenue Receipts |
|---|---|
| Fund receipt from non-operating activities, mainly from sale of investment, issue of debt, or equity. |
Fund receipt from operating activities which is the sale of goods or services. |
| It impacts the balance sheet items such as assets, liabilities, and equity. | It impacts the income statement item which is the revenue. |
| Example: Sale of fixed assets, issue debt instrument, issue equity instrument. | Examples, sale of goods or services, interest income, and other income. |