UPSC Prelims 2022 Q9: Indian Economy – Fiscal Policy & Budget
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
Answer: (a) 1 only
Explanation
Capital vs revenue expenditure for a company
| Type | Meaning | Examples |
|---|---|---|
| Capital expenditure | Spending that creates long-term assets or benefits | Buying machinery, land, new technology, patents |
| Revenue expenditure | Day-to-day running costs | Salaries, rent, electricity, repairs |
Checking the statements:
| Statement | Verdict | Reason |
|---|---|---|
| 1. Acquiring new technology is capital expenditure | Correct | Technology gives benefits over many years |
| 2. Debt financing is capex, equity financing is revenue expenditure | Wrong | Debt and equity are ways of raising money, not types of spending |
Sources of finance:
| Source | What it is |
|---|---|
| Debt | Loans and bonds — must be repaid with interest |
| Equity | Shares — owners' money, no fixed repayment |
Answer: (a) 1 only.
Why each option is right or wrong
- (a) CORRECT. New technology is a long-term asset, so it is capital expenditure; Statement 2 mixes up financing and spending.
- (b) Incorrect. Statement 2 is false; debt and equity are sources of finance, not expenditure.
- (c) Incorrect. Statement 2 is false, so 'both' fails.
- (d) Incorrect. Statement 1 is true; buying technology is capital spending.
Key point
Capex = long-term assets (machines, technology); revenue spending = running costs. Debt and equity are sources of finance, not spending.
Remember
Buying new technology is capital expenditure; debt and equity are financing, not expenditure.
Common mistakes
- Confusing how money is raised (debt or equity) with how it is spent (capital or revenue).
- Thinking technology is a running cost; it is a long-term asset.
- Treating interest payments as capital spending; interest is a revenue cost.
Exam tip
Financing answers 'where does money come from'; expenditure answers 'where does it go'.
Sources
- NCERT Class XII — Business Studies, Ch 9 (Financial Management)
- ICAI — Accounting Standards on capital and revenue expenditure