Repairs: When Do You Capitalize, When Do You Expense?
Repairs may be ordinary (i.e., recurring) or extraordinary (i.e., nonrecurring). Here’s how to know what category they fall into:
Ordinary Repairs: Normal, scheduled repairs to keep plant assets in operating condition are a period expense (charged in the period incurred), because the main benefit of the repairs and maintenance is in that period. Examples of period expenses include scheduled cleanings, equipment lubrication, replacement of minor parts, adjustment of equipment, and repainting.
Extraordinary Repairs: If the repair is of a material nature—a major overhaul, or the repair of a major component of a machine—the amount is capitalized (added to the machine cost) because the benefit is for more than the current period. How the amount is recorded—as an improvement, replacement, or addition—depends on what it was for.
Consequences of mistakes: If an asset is improperly capitalized—a repair cost is capitalized instead of expensed—assets will be overstated and, because no expense is recorded, net income will be understated. If an asset is improperly expensed, assets will be understated, and net income will be overstated.