Question

Michael took 1,000 rupees from the revenues of his business and lent it to a friend to kickstart his business. Where does this transaction fall?

• A. Capital Receipt
• B. Capital Expenditure
• C. Revenue Receipt
• D. Revenue Expenditure

Answer 1

The correct option is B

Capital Expenditure

Since the lending leads to a cash outflow from the business, this is an expenditure. Also, Michael has to receive the money back from the borrower. That is, there is an account receivable added to his balance sheet, increasing the value of assets. As this transaction leads to a change in the balance sheet, this comes under Capital budget. Therefore this is a capital expenditure.