Read the statements carefully and choose a correct option given below :
Statement I: Capital Expenditures and Revenue Expenditures both are non-recurring by Nature.
Statement II: Capital Expenditures increase earning capacity of business whereas Revenue Expenditures are incurred to maintain earning capacity.

Question

Read the statements carefully and choose a correct option given below : 
Statement I: Capital Expenditures and Revenue Expenditures both are non-recurring by Nature. 
Statement II: Capital Expenditures increase earning capacity of business whereas Revenue Expenditures are incurred to maintain earning capacity.

Accepted Answer

The correct option is 2:
The correct option is Option 2, **Only statement II is correct**, because it perfectly captures the fundamental distinction between Capital Expenditure and Revenue Expenditure in financial accounting. Capital Expenditures (CapEx) are investments in long-term assets like machinery or buildings; their primary purpose is to either acquire new assets or substantially improve existing ones, thereby *increasing the potential earning capacity* and future revenue generation of the business. Conversely, Revenue Expenditures (RevEx) are short-term costs incurred in the normal course of business, such as routine repairs, salaries, or rent. Their purpose is not to increase capacity but rather to *maintain* the current working condition and existing earning power of the assets and the business operations. Therefore, Statement II is conceptually sound and correct.

The incorrect option is 1:
Option 1 is incorrect because it claims that only Statement I is correct, when in fact, Statement I is factually inaccurate. Statement I incorrectly asserts that both Capital Expenditures and Revenue Expenditures are non-recurring by nature. While Capital Expenditures are generally non-recurring (as they are major, infrequent investments in fixed assets), Revenue Expenditures are inherently **recurring**. Revenue Expenditures are the regular, day-to-day operating costs—such as paying weekly wages, monthly rent, or making regular maintenance checks—which occur repeatedly over the business's life. Since a critical element of Statement I is false, the option selecting it as the only correct statement must also be incorrect.

The incorrect option is 3:
Option 3, which states that both statements are correct, is wrong because it hinges on the accuracy of Statement I, which we have established as false. The key difference in accounting classification depends on recurrence: Capital Expenditure is non-recurring, and Revenue Expenditure is recurring. Since Statement I incorrectly classifies Revenue Expenditure as non-recurring, the premise that both statements hold true fails.

The incorrect option is 4:
Option 4, which suggests both statements are incorrect, is also wrong because Statement II is a precise and accurate definition of the impact of the two expenditure types. As discussed, CapEx is directly aimed at increasing the scale and efficiency, hence the earning capacity, while RevEx is necessary for the upkeep and continued operation, hence maintaining the existing capacity. Since Statement II is correct, the option stating that both are incorrect is invalid.