1. Capital: The amount invested in the business by the proprietor, to run the business is known as capital. Amount brought in the business in this way may be in form of cash, goods or assets. In short, consideration given to the business by owner means capital. As the proprietor is the giver of consideration, the amount will be credited to the capital account of proprietor. On the profit or loss, right of the proprietor is there and therefore, if profit is there capital increases and if loss incurred capital decreases. In other meaning or way, capital means, excess of assets over liabilities. Capital = Assets – Liabilities.
Capital is identified on basis of nature of business, which is as follows :
- For sole proprietorship capital word is used, which owner provides.
- For partnership, partners’ capital word is used, which partners provide.
- For company, share capital word is used, which Is providesd by share-holders.
Drawings: If the owner of the business has taken away any amount of cash, goods, assets or services, for personal use, the amount so withdrawn is known as drawings. Drawing account will be opened to record the different transactions of the drawings which take place during the accounting year. Drawing account is personal account in nature. Capital will be reduced by the amount of drawings. At the end of the accounting year, drawing account is transferred to capital account, that means amount of drawing is deducted from the capital amount.
2. Capital receipts : The receipts received on sale of assets or the receipts are obtained by any long-term debt, are known as capital receipts, e.g., Income from sale of old machinery, amount received on issuing debentures, etc. Capital receipts are not received regularly and frequently. Such receipts are credited to special fund or capital fund.
Revenue receipts: Receipts received from the day-to-day transactions of the business are known as revenue receipts, e.g., brokerage received, interest received, amount received on the sale of goods, etc. The flow of these receipts would remain constant. From these receipts profit earned during the year or loss incurred can be ascertained. Such receipts are received regularly and frequently. In short routine receipts of the business are known as revenue receipts or incomes.
