Accounting for Repairs and Improvements

There are several types of expenditures relative to fixed asset repairs and maintenance: ordinary repairs and maintenance, betterment, restoration, and adaptation. Repair and maintenance expenditures are expensed in the period in which they occur and are included as an expense on the income statement. Most often these expenditures are to cover routine maintenance and upkeep. These expenditures should be expensed and charged to Repairs and Maintenance Expense as a debit. Some examples of ordinary maintenance and repairs include items such as the costs of cleaning, an oil change, a tune-up, replacing small parts, or new tires.

Big Truck Company pays $250 to change the oil in one of its delivery trucks. The delivery truck is a fixed asset, and the company has just incurred a maintenance and repair cost. The nature of the cost is ordinary, so it is charged to the Repairs and Maintenance Expense account on the income statement. Big Truck Company makes an entry for the oil change.

A capital expenditure is a cost incurred to purchase a fixed asset, enhance an existing fixed asset, or extend its useful life, benefiting future periods. Such a cost may include money paid by a company that relates to acquiring or upgrading fixed assets, such as equipment, vehicles, buildings, and land.

Capital expenditures are capitalized on a company's financial statements and then depreciated over the life of the asset, using whatever depreciation method the company chooses to best estimate the asset's value at a given point of time—including straight-line depreciation, double-declining depreciation, or units of production. This allows for matching the use of the capital expenditure to the expense on the income statement.

The difference between routine maintenance and capital expenditures can be unclear. Routine maintenance is an expense that can be taken when the maintenance and repair is done. For example, putting oil in a truck occurs often and is routine, so this expense is fully taken when the maintenance occurs. A routine expense is expensed as incurred. To qualify as a capital expenditure, however, the expenditure, which may be major or extraordinary, is tested for betterment, restoration, or adaptation to a new or different use.

A betterment is a type of repair that improves an asset so that its condition is better than its original condition. It would improve the asset's performance or efficiency. For example, a betterment for a truck might be installing an entirely new engine or hydraulic lift. The repair would improve the truck compared to its previous condition and be considered a capital expenditure. There would be a journal entry for a $6,800 improvement to a truck.

Restoration is a type of repair that renovates an older asset to a like-new condition. For example, a company has a printing press that is 10 years old. The company can either restore it by cleaning and replacing the main components or by buying a new press. If the printing press is restored, the condition will be close to new condition, and its useful life will be extended by 10 years. In this case, the restoration will be a capital expenditure and can be capitalized, as if it were purchased new.

Adaptation is a type of repair that changes an asset's original use to a new or different use. Adaptation is another test to see if an asset should be capitalized. For example, a company makes parts for simple coffee makers. The company reinvents one part so that it can steam milk. This change would be an adaptation to a new and different use, so the cost of adapting the part would be a capital expenditure and must be capitalized and depreciated.