Distinguish between capital expenditures and revenue expenditures with examples.

• A. Capital expenditures add to asset base (e.g., purchase of equipment); revenue expenditures are current period expenses (e.g., maintenance).
• B. Capital expenditures are expensed immediately; revenue expenditures are capitalized.
• C. Capital expenditures decrease liabilities; revenue expenditures increase assets.
• D. Capital expenditures are recorded as revenue; revenue expenditures are recorded as assets.

Answer: (D)

The main idea is to separate costs that create or improve a long-term asset from those that keep the business running in the current period. A capital expenditure is money spent on something that will benefit more than one period and is added to the asset base on the balance sheet, then depreciated over its useful life. Examples include buying new equipment, upgrading a building, or extending the life of an asset through improvements. A revenue expenditure, on the other hand, is an ordinary operating cost that is expensed in the period it’s incurred, because it does not create a lasting asset; examples include routine maintenance, repairs, or small purchases needed for daily operations.

The statement that capital expenditures are recorded as revenue and revenue expenditures are recorded as assets is not correct because it reverses the proper treatment: capital expenditures should be capitalized as assets, not expensed, and revenue expenditures should be expensed in the current period, not recorded as assets.