Accounting for Revenue and Capital Expenditures

Technically, a repair or maintenance is an expenditure that maintains the asset’s expected level of service or output and neither extends its useful life nor increases the quantity or quality of its output. Accounting for these expenditures is often accomplished by debiting the asset’s accumulated depreciation account or, in the case of an addition, debiting the asset account itself. The distinction between capital and revenue expenditures is often hazy, depending on the accounting policies developed by management. On the other hand, assume that ABC Boating Company has decided to overhaul one of its lines of boats. Twenty of the boats’ older engines are swapped out for new, more powerful engines. The new engines are predicted to extend the useful life of the boat for an additional five years.

The cost of extraordinary repairs should be included in the cost of the fixed asset that was repaired, and depreciated over the revised remaining life of the asset. If the remaining life of the underlying asset is relatively short, then the depreciation period for the extraordinary repairs may only cover a few months, or perhaps a couple of years. In terms of plant and equipment, capital expenditures made after the purchase of an asset are considered additions, betterments, or extraordinary repairs. Capital Expenditures (additions, betterment, extraordinary repairs) are debited to it’s corresponding asset account. The asset’s book value increases by the amount of Capital Expenditure and Depreciation is revised to show the cost recovery. Extraordinary repairs are extensive repairs to machinery, with the intent of prolonging the life of the machinery.

Accounting for Revenue Expenditures

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What is the primary reason for capitalizing expenses?

All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. According to this article, it is to trace and record the cost of an asset in relationship to its useful life. However, the distinction is important because it affects how income in current and future periods is viewed. Ask a question about your financial situation providing as much detail as possible.

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4. Subsequent expenditures made on property, plant, and equipment may be in the form of either capital expenditures or revenue expenditures.
5. If an improvement increases the useful life of the asset (fancy weather-resistant shingles on a roof, for example), you should decrease the accumulated depreciation account to record the value of the extraordinary repair expenditures.

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With the new engines that extend that life by five years, the boats now have a remaining useful life of 10 years. The increase in value to the fixed asset will add an additional $40,000 ($400,000 increase in value / 10 years) to each year’s depreciation expense. This additional cost will flow through to the income statement over the course of those 10 years.

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If an improvement increases the useful life of the asset (fancy weather-resistant shingles on a roof, for example), you should decrease the accumulated depreciation account to record the value of the extraordinary repair expenditures. Extraordinary repairs are capitalized, which means the repair cost increases the book value of the fixed asset that was improved as a result of the repair. The extraordinary repair cost may be added to the original fixed asset or it could be identified as a separate fixed asset item directly underneath the original, in order to keep clean accounting records.