Q.Distinguish between Revenue Expenditure and Capital Expenditure, giving two examples of each.

The distinction rests entirely on whether the spending creates an asset or reduces a liability — capital expenditure does one of these; revenue expenditure does neither.

Revenue Expenditure is expenditure that neither creates an asset for the government nor causes any reduction in its liabilities — it is the recurring, day-to-day cost of running the government. Examples: salaries and pensions paid to government employees; interest payments on past borrowing; subsidies on food, fertiliser, or petroleum; and grants given for current (non-asset) purposes.

Capital Expenditure is expenditure that either creates an asset for the government or reduces one of its liabilities. Examples: construction of roads, bridges, schools, and hospitals (asset-creating); purchase of machinery and equipment (asset-creating); and repayment of a loan taken in an earlier year (liability-reducing, even though no new asset results).

Students sometimes assume capital expenditure must always be large in amount — the correct criterion is purely whether the spending creates an asset or reduces a liability, regardless of the rupee amount involved; a small machinery purchase is still capital expenditure, and a very large subsidy bill is still revenue expenditure.