Q. 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: (UPSC Prelims 2022)
Answer:
1 only
Notes: The correct answer is
[A] 1 only. In accounting and public finance, expenditure is categorized based on whether it creates assets or reduces liabilities over the long term.
- Acquiring new technology (Statement 1 – Correct): Expenditure that results in the creation of an asset or provides a benefit that extends beyond a single financial year is classified as Capital Expenditure (CapEx). Investing in new technology, machinery, or intellectual property enhances the future productive capacity of a company and is therefore a capital expense.
- Financing Types (Statement 2 – Incorrect): Both debt financing (borrowing money) and equity financing (issuing shares) are methods of raising capital; they are not "expenditures" in themselves. However, the repayment of the principal amount of a loan is considered capital expenditure because it reduces a liability. Conversely, the payment of interest on debt or dividends on equity is classified as Revenue Expenditure, as these are recurring costs incurred to maintain the financing.
Revenue expenditure refers to the short-term expenses used in the day-to-day operations of a business (like salaries, rent, and electricity), which do not result in the creation of a physical or intangible asset.