Question

ASSERTION(A): Capital expenditure increases the earning capacity of the business.

REASON(R): Capital expenditure is incurred for day-to-day conduct of the business.

Options

• A is true, and R is the correct explanation of A.

• A is true, but R is not the correct explanation of A.

• A is true, but R is false.

• A is false, but R is true.

Answer 1

A is true, but R is false.

Explanation:

The assertion is true because capital expenditure increases a business’s earning capacity by creating or improving long-term assets, such as machinery and buildings, that provide benefits in future years. However, the Reason is false because expenditure incurred for the day-to-day conduct of business is known as revenue expenditure, not capital expenditure.