With reference to the expenditure made by an organization or a company, which of the following statements is/are correct?
- Acquiring new technology is a capital expenditure.
- Debt financing is considered capital expenditure, while equity financing is considered revenue expenditure.
Select the correct answer using the code given below:
- 1 only
- 2 only
- Both 1 and 2
- Neither 1 nor 2
Example
Statement 1 is correct
- Acquiring new technology is a capital expenditure. This is because it involves spending money on an asset that is expected to provide benefits for a long period, typically more than a year. New technology can enhance productivity, efficiency, or create new revenue streams, thus generating long-term value for the organization.
Statement 2 is incorrect
- Debt financing is not considered capital expenditure; rather, it is a method of raising funds. Similarly, equity financing is also a method of raising funds and not categorized as revenue expenditure.
| Parameters | Debt financing | Equity financing |
| Meaning | Debt financing involves borrowing money from external sources, such as: Bank Financial institutions, or Individual investors
The borrowing company promises to Repay the principal amount, and Make timely payments of interest |
Equity financing involves selling a portion of ownership in the business to investors in exchange for capital.
In the case of a company, it refers to selling equity shares in the equity market |
| Example | A manufacturing company in India takes out a loan of Rs. 10,00,000 from a bank to purchase new machinery.
The company agrees to repay the loan amount along with an interest rate of 10% per annum over the next five years. |
A technology startup in India raises Rs. 50,00,000 in equity financing from a group of angel investors.
In exchange, it offered 20% of the paid-up capital, or we can say 20% ownership stake in the company. |
