Q. With reference to the expenditure made by an organisation or a company, which of the following statements is/are correct?
1. Acquiring new technology is capital expenditure.
2. Debt financing is considered capital expenditure, while equity financing is considered revenue expenditure.
Select the correct answer using the code given below:
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2
Correct Answer: a) 1 only
Question from UPSC Prelims 2022 GS Paper
Explanation :
Capital Expenditure
Acquiring new technology is capital expenditure. This statement is correct. Capital expenditure (CapEx) refers to the funds used by a company to acquire, upgrade, and maintain physical assets such as property, industrial buildings, or equipment. This can also include investment in technology such as new software or hardware that is expected to improve the company’s productivity or capacity over the long term. These types of expenses are capitalized, meaning the cost is spread out over the useful life of the asset rather than being fully expensed in the year they were incurred.
Difference Between Capital and Revenue Expenditure
Debt financing is considered capital expenditure, while equity financing is considered revenue expenditure. This statement is incorrect. Debt financing and equity financing are not categorized as expenditures but as forms of raising capital for the company. Debt financing involves borrowing funds that will need to be repaid over time with interest, while equity financing involves selling shares of the company’s stock to raise funds.
Debt Financing Explained
Debt financing does not constitute an expenditure but rather a liability that the company takes on. The interest payments made on the debt can be considered an operating expense, but the principal amount borrowed is not an expenditure; it’s a form of financing.
Equity Financing Explained
Equity financing is not an expenditure either. It is a transaction where the company is exchanging ownership (equity) for capital. It does not appear on the income statement like revenue or expenses do. Instead, it is recorded in the equity section of the balance sheet.
Therefore, the first statement is correct in identifying the acquisition of new technology as capital expenditure, while the second statement is incorrect in categorizing debt and equity financing as capital and revenue expenditures, respectively.
