Accounting for Revenue and Capital Expenditures
In order to adequately maintain the docks and provide safe storage for its boats, ABC must routinely replace rotten or damaged boards on the docks. These costs are incurred as part of general maintenance and do not extend the life of the dock at all. This would be an ordinary repair, and the accountants at…
In order to adequately maintain the docks and provide safe storage for its boats, ABC must routinely replace rotten or damaged boards on the docks. These costs are incurred as part of general maintenance and do not extend the life of the dock at all. This would be an ordinary repair, and the accountants at ABC would record the transaction as a debit to repairs expense and a credit to the cash balance. According to generally agreed accounting principles (GAAP), extraordinary repairs are generally capitalized if the useful life is increased by more than a year. It may be more practical from an accounting perspective to record the cost of an extraordinary repair as a separate fixed asset, which makes the fixed asset records easier to understand. Otherwise, a fixed asset record might include a series of additions, each one for the expenditures related to a separate extraordinary repair.
Accounting for Revenue Expenditures
ABC spends $20,000 on each boat, for a total of $400,000, which is a material cost to the company. Regardless of how these expenditures are described, they either extend the asset’s useful life or increase the quantity or quality of its output. Andy Smith is a Certified Financial Planner (CFP®), licensed realtor and educator with over 35 years of diverse financial management experience. He is an expert on personal finance, corporate finance and real estate and has assisted thousands of clients in meeting their financial goals over his career. A financial professional will offer guidance based on the information provided and offer a no-obligation call to better understand your situation.
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- Similarly, if a machine’s expected life is only prolonged by a few months, it is more prudent to expense the repair cost.
- Revenue expenditures are expenditures whose benefits are used up or consumed in the current period.
- Extraordinary repairs, in the field of accounting, are extensive repairs made to an asset, such as property or equipment (PP&E), which prolongs its useful life and increases its book value.
- They should be expensed when they are incurred, and then charged to a maintenance allowance account.
Understanding Extraordinary Repairs
Similarly, if a machine’s expected life is only prolonged by a few months, it is more prudent to expense the repair cost. As a result of this transaction, ABC’s accountants will debit (increase) their fixed asset account and credit accounts payable (AP) by $400,000. The fixed assets on the balance sheet will show this increase in value immediately in the current accounting period.
Also, if the amount by which the life of the machinery is prolonged is relatively minor (such as a few months), it is also more efficient to simply charge the repair cost to expense as incurred. Ordinary repairs are simply recorded as expenses in the current accounting period, leaving the book value of the related fixed asset unchanged. Expenses are costs recorded on a company’s income statement in the period in which the cost is extraordinary repairs accounting incurred. If the amount spent on an extraordinary repair is immaterial, it is more efficient from an accounting perspective to charge the cost to expense as incurred, rather than adjusting the book value of the fixed asset.
This would be a Capital Expenditure because the company has purchased something that will increase production and extend its useful life. Revenue expenditures are expenditures whose benefits are used up or consumed in the current period. Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications. Our work has been directly cited by organizations including Entrepreneur, Business Insider, Investopedia, Forbes, CNBC, and many others. Finance Strategists is a leading financial education organization that connects people with financial professionals, priding itself on providing accurate and reliable financial information to millions of readers each year. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice.
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.