Accounting for repair and maintenance costs

January 28, 2012

Learn about accounting for repair and maintenance costs for fixed assets.

1. Ordinary versus major and extraordinary repair costs

Subsequent to the acquisition of fixed assets, a company may accrue costs for additions, improvements and replacements, rearrangements and reinstallations, maintenance and repairs of these assets. The accounting for the above-listed costs may be different. Let us look at the accounting practices for such costs.

The accounting for maintenance and repair expenditures depends on the nature of the repairs: whether such repairs are ordinary, major, or extraordinary. Ordinary repairs are performed to maintain fixed assets in operating condition. Ordinary repairs usually benefit only the period when such repairs are done. As the result, ordinary repairs are expensed in the period incurred. Ordinary repairs represent revenue expenditures. Examples of ordinary maintenance and repair activities include painting, repairing plumbing, adjusting and cleaning equipment, lubricating machines, replacing minor parts, putting in fuel, and so on.

Major and extraordinary repairs are the repairs that benefit more than one year or operating cycle, whichever is longer. Extraordinary repairs occur rarely, require large amounts of money, and increase the economic life of the asset. Because major and extraordinary repairs benefit multiple future periods, they are accounted for as additions, improvements, or replacements. In other words, major and extraordinary repairs represent capital expenditures. Hence, such repairs may be capitalized. Note, however, that even when a company can estimate its future major repairs, the company cannot accrue in advance for such repairs (i.e., accrue-in-advance method is prohibited).

2. Accounting for ordinary repairs

Ordinary maintenance and repair costs are accounted for in two ways:

  • Expensed when incurred
  • Charged to a maintenance allowance account

Ordinary maintenance and repair costs are revenue expenditures and are expensed in the period incurred. They are charged to the Repairs and Maintenance Expense account. For instance, to record $500 for the lubrication of machinery equipment, the following journal entry would be made:

Account Titles

Debit

Credit

Repairs and Maintenance Expense

500

 

      Cash/Accounts Payable

 

500

3. Accounting for major and extraordinary repairs

Major repairs are capital expenditures and thus are recorded as an increase to the fixed asset account. For example, Company XYZ performed major repairs of $100,000 to its plant plumbing system: these repairs improved the fixed asset. The company does not know the carrying value of the plumbing system. The company should capitalize the cost of the repairs to an asset account as follows:

Account Titles

Debit

Credit

Plant Assets

100,000

 

      Cash/Accounts Payable

 

100,000

Company XYZ also did some extraordinary repairs of $50,000 (e.g., changed engines) on its delivery trucks. These repairs extended the useful life of the trucks. Thus, these repair costs represent capital expenditures. The company does not know the carrying value of the delivery trucks. The company should decrease accumulated depreciation account to record the extraordinary repair expenditures:

Account Titles

Debit

Credit

Accumulated Depreciation Delivery Trucks

50,000

 

      Cash/Accounts Payable

 

50,000

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