Distinguish between revenue expenditure and capital expenditure.
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What is the basis of classifying government expenditure into revenue expenditure and capital expenditure? 

Difference between Revenue Expenditure and Capital Expenditure. An expenditure that neither creates assets nor reduces a liability is categorised as revenue expenditure. If it creates an asset or reduces a liability, it is categorised as capital expenditure. This is the basis of classification between the two.

(i) Revenue Expenditure. Simply put, an expenditure which neither creates assets nor reduces liability is called Revenue Expenditure, i.e., Salaries of employees, interest payment on post debt, subsidies, pension, etc. These are financed out of revenue receipts. Broadly, any expenditure that does not lead to any creation of assets or reduction in liability is treated as revenue expenditure. Generally, expenditure incurred on normal running of the government departments and maintenance of services is treated as revenue expenditure. Examples of revenue expenditure are salaries of government employees, interest payment on loans taken by the government, pensions, subsidies, grants, rural development, education and health services, etc. It is a short period expenditure and recurring in nature which is incurred every year (as against capital expenditure which is long period expenditure and non-recurring in nature). The purpose of such expenditure is not to build up any capital asset but to ensure normal functioning of government machinery. Traditionally, all grants given to state governments are treated as revenue expenditure even though some of the grants may be for creation of assets.

(ii) Capital Expenditure. An expenditure which either creates an asset (e.g., School building) or reduces a liability (e.g., repayment of loan) is called capital expenditure. (A) Capital expenditure which leads to creation of assets are (a) expenditure on purchase of assets like land, buildings, machinery and construction of roads, canals, etc. (b) investment in shares, loans by central government to state government, foreign governments and government companies, cash in hand, and (c) acquisition of valuables. Such expenditure is incurred on long period development programmes, real capital assets and financial assets. This type of expenditure adds to the capital stock of the economy and raises its capacity to produce more in future. (B) Repayment of loan to World Bank, foreign government, etc. is also capital expenditure because it reduces liability. Such expenditure is met out of capital receipts of the government including borrowing from public and foreign governments.