🧷 Authentic Classroom Explanation by IAS Monk

📌 The Question:

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

🧠 Classroom Explanation

• Statement 1 is correct
  • Capital Expenditure (CapEx) refers to spending that creates future economic benefits or adds to productive capacity.
  • Acquisition of new technology, software, machinery, or equipment improves long-term efficiency and output.
  • Hence, acquiring new technology is capital expenditure.
• Statement 2 is not correct
  • Debt financing and equity financing are modes of raising funds, not expenditures.
  • Both debt and equity are treated as capital receipts, because:
    • Debt creates a liability
    • Equity creates ownership claims
  • Whether funds are raised via debt or equity, their use determines expenditure, not their source.
  • Therefore, it is incorrect to classify:
    • debt financing as capital expenditure, and
    • equity financing as revenue expenditure.

👉 Hence, only Statement 1 is correct.

🔍 Curiosity Raiser

Is it the source of money that defines expenditure,
or the use of money?

🧘 IAS Monk Whisper

Money raised is silent.
Money spent reveals intent.