A revenue receipt is money earned from the normal activities of the business, such as sales, commission received and rent received. A capital receipt is money that comes in from the owner, a lender or the sale of a non-current asset. Only revenue receipts are income that can contribute to profit.
This lesson sits in capital and revenue treatment as the mirror image of classifying a repair versus an improvement: the same two-way question, but for cash coming in.
How do you tell the two kinds of receipt apart?
Ask: did the business earn this by trading, or did someone give it money or buy an asset from it?
Revenue receipts usually come from what the business does every month: sales of goods or services, commission received, rent received from a tenant, interest received and discount received.
Capital receipts change the structure of the business instead:
- Capital introduced by the owner increases the owner’s claim on the business.
- A loan creates a liability, because it has to be repaid.
- Proceeds from selling a non-current asset exchange one asset for cash.
The double entries show the difference. Owner pays in cash: debit Bank, credit Capital; loan received: debit Bank, credit Loan. In neither case does an income account such as Sales appear.
Worked example
Mawar Florist’s bank statement shows these receipts for the month.
| Receipt | RM |
|---|---|
| Sales of bouquets | 8,400 |
| Cash paid in by the owner | 15,000 |
| Loan from a bank | 20,000 |
| Sale of an old delivery van | 7,000 |
| Commission received from a wedding planner | 600 |
| Rent received for subletting a storage corner | 1,500 |
Step 1, total all receipts. 8,400 + 15,000 + 20,000 + 7,000 + 600 + 1,500 = RM 52,500.
Step 2, pick out the revenue receipts. Sales, commission and rent are earned from trading: 8,400 + 600 + 1,500 = RM 10,500.
Step 3, pick out the capital receipts. The owner’s payment, the loan and the van sale: 15,000 + 20,000 + 7,000 = RM 42,000.
Step 4, check. 10,500 + 42,000 = 52,500, which agrees with Step 1.
Only RM 10,500 belongs among the income items in the income statement. The RM 42,000 appears elsewhere: capital and the loan on the statement of financial position, and the van sale in the asset disposal workings.
The mistake to watch for
The common slip is to treat every receipt as income because every receipt is cash.
Mistaken answer: “Total receipts for the month were RM 52,500, so income was RM 52,500.”
The student added the bank deposits and ignored where the money came from.
The result is that income is overstated by RM 42,000. If this were carried into the profit calculation, profit would be overstated by the same amount, because no cost is set against the loan or the owner’s payment.
The correction is to label each receipt with its source before adding anything. A short column headed “Earned from trading (yes or no)” is enough. This habit also helps in questions on cash versus profit, where cash movement and profit are deliberately different.
Check yourself
Try these on paper first.
1. Kedai Ros banked these receipts: sales RM 3,000, a loan RM 5,000 and rent received RM 400. How much is revenue income?
Show answer
Sales and rent received are earned from trading: 3,000 + 400 = RM 3,400. The RM 5,000 loan is a capital receipt and is a liability, not income.
2. Classify each as revenue or capital receipt: (a) interest received on a savings account, RM 90; (b) owner pays in RM 4,000; (c) old shelves sold for RM 250.
Show answer
(a) Revenue receipt: interest received is income earned from the business’s money. (b) Capital receipt: capital introduced by the owner. (c) Capital receipt: proceeds from selling a non-current asset, not sales.
3. A student writes, “A loan is income because it increases the bank balance.” Give a one-sentence correction.
Show answer
A loan increases the bank balance but also creates a liability of the same amount that must be repaid, so it is not earned and does not increase profit.
Where this leads next
Misclassifying a receipt or a payment changes reported profit, and the next lesson puts numbers on that: calculating the profit effect of misclassification. To practise sorting transactions into the right ledger accounts, try the double-entry and ledger trainer, then attempt the capital and revenue practice set.
Students who sort receipts correctly in class but add the wrong ones in a long question often need someone to read their working line by line. That is something we do in online one-to-one Accounting tuition.