Accounting for Repairs and Maintenance Expense – Expense or Capitalize?

What is meant by Repairs and Maintenance Expense?

Repairs and Maintenance Expenses can be defined as costs that are incurred in order to restore the condition of the asset. The proper accounting that is incurred for these costs is to charge them to the respective expense period when the cost is actually incurred, as per the accrual basis of accounting. However, when cash basis of accounting is used, the cost is subsequently charged to the expense account when the invoice has been paid and duly settled.

During the normal course of the business, repairs and maintenance-related expenses are quite common, since these are the costs that are incurred with the normal running and functioning of the business. Factually, it can be seen that repairs and maintenance-related expenses are normal costs that occur simply because of the normal functioning of the business. It is a routine expenditure that cannot always be estimated well in advance by the company.

Categorization of Repairs and Maintenance Costs

Repairs and Maintenance are costs that are associated with the plant and machinery possessed by the company. Therefore, it is treated as an expense and debited to the Profit and Loss Account.

Since Repairs and Maintenance represent a cash outflow from the company, and therefore, it is represented as an expense in the financial statements. This particular expense is categorized as an operating expense, primarily because of the fact that it does not result in any improvement in the asset itself, but only ensures smooth running and functionality of the asset.

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Companies mostly spend on repair and maintenance expenses in order to keep assets operating at an optimum level.

Examples of Repairs and Maintenance Costs

As mentioned earlier, repairs and maintenance costs are costs that are associated with day to day functioning of the business. Some examples of repairs and maintenance costs are as follows:

  • Building renovations and repaint
  • Machinery repairs and oil change
  • Regular machine maintenance e.g. gas refueling, filter cleaning
  • Motor work and repairs

Accounting for Repairs and Maintenance Expenses

Repairs and Maintenance Expenses are recorded as operating expenses in the financial statements of the company. It is recorded on an accrual basis, with costs associated with the current year being expensed in the current year only. The journal entries used to record Repairs and Maintenance Expenses are as follows:

AccountDebitCredit
Repairs and Maintenance Costsxxx 
Cash / Repairs and Maintenance Cost Payablexxx

If there is any unpaid balance of Repairs and Maintenance Costs, it is represented on the Balance Sheet as a Current Liability for the given year.

Accounting for Repairs and Maintenance Expenses – Example

Tripsy Co. is a consulting company that provides accounting services to various different entities. During the month of October 2020, the company spends an amount of $8,000 on various different expenses that mainly includes the following:

  • Conveyance for staff: $2000
  • Utilities expense: $3000
  • Office window repair: $ 500
  • Office lock repair: $500
  • Internet Modem upgradation: $1000
  • Motor repair work: $1000

Based on the expenses mentioned above, it can be seen that expenses relevant to Repairs and Maintenance are as follows:

  • Office window repair: $500
  • Office lock repair: $500
  • Motor Repair work: $1000
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Therefore the total expenses pertinent to repairs and maintenance amount to $2000. These expenses need to be recorded as repairs and maintenance expenses in the Profit and Loss Account of the company. The journal entry to record this expense is to debit the Profit and Loss Account, and credit the cash account. The journal entry to show this is as follows:

AccountDebitCredit
Repairs and Maintenance Expense$2,000 
Cash   $2,000

Let’s assume that Tripsy Co. did not pay the Repairs and Maintenance Expenses upfront. In this regard, the journal entry would be as follows:

AccountDebitCredit
Repairs and Maintenance Expense$2,000 
Current Liability: Repairs and Maintenance Expense Payable   $2,000

Capitalization of Repairs and Maintenance Expenses

Under most circumstances, Repairs and Maintenance Expenses are categorized as operating expenses. However, there are also instances where Repairs and Maintenance Expenses are capitalized into the cost of the asset itself.

Any Repairs and Maintenance related expense that increases the useful life or the production capacity of a given asset is capitalized into the assets. This implies that any cost that results in value addition in a machinery should be capitalized into the cost of the asset itself.

Hence, any Repairs and Maintenance Expense, that results in value addition towards the machinery in the form of better performance or increased useful life should be capitalized and included in the cost of the asset itself.

Some examples of Repairs and Maintenance Expenses that should be capitalized are as follows:

  • Renovating a floor to change it from office to warehouse
  • Adding pool to a building roof
  • Replacement of HVAC in the building for better functionality
  • Repairing the car of the accident
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In the case where Repairs and Maintenance Expenses are capitalized, the following journal entries are made:

AccountDebitCredit
Fixed Assetsxxx 
Cash     xxx

Subsequently, all capitalized repairs and maintenance related expenses are as follows:

AccountDebitCredit
Depreciation Expensesxxx 
Accumulated Depreciation      xxx

Example of Capitalized Repairs and Maintenance

The concept of capitalized repairs and maintenance example is explained via the following illustration:

Byers Co. is a construction company that provides furniture to different companies. During the month of June 2020, the company spent an amount of $20,000 to add on an additional component in the machinery that would result in increased production outputs. This would also add a further life of 10 years to the machinery.

The journal entry to record this particular transaction is as follows:

AccountDebitCredit
Fixed Assets$20,000 
Cash     $20,000

In the same manner, there are also entries that are made for depreciation related expenses:

AccountDebitCredit
Depreciation Expenses$2,000 
Accumulated Depreciation      $2,000
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