Accounting Treatment of Capital Receipts

As capital receipts do not have an impact on the profit or loss of the company, and either increase liability or reduce its assets, they are shown in the Balance Sheet.

Illustration:

Determine which of the following is a Capital Receipt:

1. Corporate Tax.

2. Loan taken for ₹5,000.

3. Receipt from the sale of shares.

4. Dividend paid to shareholders.

5. Capital invested by the owner of the company.

Solution:

1. Corporate Tax is not a Capital Receipt because it does not either create liability or reduce the assets of the firm.

2. Loan taken of ₹5,000 is a Capital Receipt because it creates liability for the company. It will be shown on the Liabilities side of the Balance Sheet.

3. Receipt from the sale of shares is a Capital Receipt because it reduces the assets of the company. The equity account will be credited with the receipt amount on the Liabilities side of the Balance Sheet.

4. Dividend paid to shareholders is not a Capital Receipt because it does not create liability for the company.

5. Capital invested by the owner of the company is a Capital Receipt because it increases the liability of the company. It will be shown on the Liability side of the Balance Sheet.