Capital Expenditure and Revenue Expenditure UPSC pre 2022

 This question was a medium-level question because capital expenditure was in the news and it is a basic term but Debt financing and Equity financing was not that famous term.

 

With reference to the expenditure made by an organisation or a company, which of the following statements is/are correct ?--UPSC pre 2022

 

1. Acquiring new technology is a capital expenditure.

2. Debt financing is considered a capital expenditure, while equity financing is considered a 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

 

Solution

A

 

Statement -1. Acquiring new technology is a capital expenditure.

 

What are Capital Expenditures?

 

Capital expenditures (CapEx) are funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment.

 

It is often used to undertake new projects or investments by a company.

 

Costs to upgrade or purchase software, and investing in new technology and computer equipment, are considered part of Capital expenditure.

 

As they are often employed to improve operational efficiency, increase revenue in the long term, or make improvements to the existing assets of a company.

 

Hence statement 1 is correct.

 

 

Statement - 2. Debt financing is considered capital expenditure, while equity financing is considered revenue expenditure.

 

What is Debt Financing?

 

In Simple word it is taking Debt to run a business.

 

Using Debt instrument like bonds, bills, or notes.

 

It could be in the form of a secured as well as an unsecured loan.

 

Debt financing is the opposite of equity financing, In which it is necessary to issue stock to raise money.

 

Both debt financing and equity financing are used for capital expenditures such as to grow or expand operations.

 

What is Revenue expenditure?

 

Revenue expenditures are almost same as operating expenses (OPEX).

 

For example - Salary, Revenue, Rent etc.

 

So, 2 is not correct.

What is the difference between Revenue and capital Expenditure?

Capital expenditure is the money spent by a firm to acquire assets or to improve the quality of existing ones. 

Revenue expenditure is the money spent by business entities to maintain their everyday operations. 

Let's attempt question to revise the concept