In the context of Budget, which of the following statement is correct regarding capital expenditure? I. It does not creates physical or financial assets. II. Acquisition of machinery is an example of capital expenditure.
Only II
In government budgeting, expenditure is classified as either revenue expenditure or capital expenditure, and the two are distinguished by their effect on the government's assets and liabilities.
Capital expenditure is spending that either creates physical or financial assets for the government or reduces its liabilities, for example building roads, buying machinery, or repaying loan principal.
Statement I claims that capital expenditure does not create physical or financial assets; this reverses the actual definition and is therefore incorrect.
Revenue expenditure, in contrast, is the kind of spending that neither creates assets nor reduces liabilities, such as salaries, subsidies and interest payments, so Statement I actually describes revenue, not capital, expenditure.
Statement II says that acquisition of machinery is an example of capital expenditure; machinery is a durable physical asset, so this statement is correct.
Thus Statement I is wrong and Statement II is right, which means only the second statement holds.
Hence the correct answer is Only II.
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