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 :

Q 6 / 15

UPSC CSE Prelims 2022

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 :

EXPLANATION

Correct Option

Statement 1 is correct. Capital expenditure refers to funds spent by an organisation to acquire, upgrade, or maintain long-term assets that are expected to provide economic benefits over more than one accounting period. These assets can be tangible (e.g., machinery, buildings) or intangible (e.g., patents, software, new technology). Acquiring new technology enhances future earning potential, improves production capacity, or increases operational efficiency over an extended period. Therefore, it is classified as a capital expenditure.

Incorrect Options

Statement 2 is incorrect. Debt financing and equity financing are methods of raising capital for an organisation, representing sources of funds rather than expenditures. An expenditure is an outflow of funds for goods or services. Capital expenditure involves the acquisition of long-term assets, while revenue expenditure covers short-term, day-to-day operational costs. The act of raising capital through debt or equity does not constitute an expenditure in either of these categories. Equity financing, for instance, is a part of the company's capital structure and represents ownership, not an operational expense or a revenue expenditure.

SOURCEIndian Economy by Ramesh Singh, Chapter 14: Financial Markets