With reference to the expenditure made by an organisation or a company, which of the following statements is/are correct ?
- Acquiring new technology is capital expenditure.
- Debt financing is considered capital expenditure, while equity financing is considered revenue expenditure.
Select the correct answer using the code given below:
Detailed Explanation:
Answer: Option 1 — 1 only
The question tests the understanding of capital and revenue expenditure in organizational accounting. Statement 1 is correct as acquiring new technology represents a long-term investment that benefits the organization over multiple years, making it a capital expenditure. Statement 2 is incorrect because the mode of financing (debt or equity) does not determine the nature of expenditure; rather, it is the nature and purpose of the expense itself that classifies it as capital or revenue expenditure.
✅ Statement 1 – Correct: Acquiring new technology is a capital expenditure as it creates long-term assets (software, machinery, equipment) that are capitalized on the balance sheet and depreciated over their useful life.
❌ Statement 2 – Incorrect: Debt and equity financing are methods of raising capital, not types of expenditure; both can be used to fund either capital or revenue expenditures, and the classification depends on the nature of the expense, not its funding source.
📝 Short Notes: Capital vs Revenue Expenditure
| Aspect | Capital Expenditure | Revenue Expenditure |
|---|---|---|
| Definition | Expenditure for acquiring/improving fixed assets providing long-term benefits | Expenditure for routine operations and maintenance providing short-term benefits |
| Purpose | Acquire, enhance, or extend life of assets (buildings, machinery, equipment) | Meet day-to-day operational needs (salaries, utilities, maintenance) |
| Impact on Assets | Increases asset value or creates new assets | Does not increase asset value |
| Accounting Treatment | Recorded as asset on balance sheet and depreciated over time | Recorded as expense in profit & loss statement for current period |
| Time Horizon | Long-term benefit (several years) | Short-term benefit (current year) |
| Examples | Purchase of machinery, construction of buildings, land acquisition, technology acquisition | Salaries, wages, rent, repairs, maintenance, office supplies |
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