Accounting for Repair and Maintenance
Repair and Maintenance is the amount that a company spends to restore the condition of the fixed assets. The company spends this cost to restore assets to the previous condition or keep the present condition over a longer period of time.
In business, repair and maintenance are very common as long as the entity owns the fixed assets. Those assets will not work in the best condition forever. At some points, they will brokedown and require repair. Some other assets may require regular maintenance in order to operate properly.
In accounting, both types of repairs are treated separately based on their nature. Not all repairs are treated equally. Repair and Maintenance can be classified as the company operating expense or capitalize as the assets and depreciate over time.
Repair and Maintenance Expense
Normal repair and maintenance expense that incurs regularly is classified as the operating expense. It is the expense which not bring any improvement to the assets, but only to keep the assets at the current state over long term. The company needs to spend on repair and maintenance expenses to keep the assets operating in optimal condition. Some assets require regular maintenance to keep operating at the optimal level.
Repair and maintenance expenses are necessary for the assets and they incur on a regular basis. Without them, the assets such as machinery will not work properly in the current condition.
Example of Repair and Maintenance Expenses
- Building Painting
- Car regular maintenance such as oil and some accessory
- Change Machinery oil
- Air Con cleaning
- Repair Broken pipe of the building
Accounting for Repair & Maintenance Expense
Repair and maintenance expense is recorded as the operating expense base on accrued basic. The journal entry should be debiting repair and maintenance expenses and credit accounts payable or cash.
| Account | Debit | Credit |
|---|---|---|
| Repair and Maintenance Expense | 000 | |
| Accounts Payable/Cash | 000 |
This transaction will impact both income statement and balance sheet. Repair and maintenance expenses will be present on income statement and reduce the company profit. Accounts payable is the company obligation to pay the supplier in the next period. If the company pays cash immediately, it will be deducted from the balance sheet.
Repair & Maintenance Expense Journal Entry Example
ABC is a consulting company that provides accounting services to other entities. During the month of November, the company spends $ 5,000 on the various expense which includes:
- Taxi for staffs $ 200
- Utilities expense $ 2,000
- Repair window office $ 800
- Change company tire $ 100
- Change office lock $ 100
- Pay for internet service $ 500
- Other petty cash expense $ 1,300
Please check if any expenses related to repair and maintenance expenses.
Based on the expenses list above, there are three items related to repair and maintenance expenses. They include:
- Repair window office $ 800
- Change company car tire $ 100
- Change office lock $ 1000
These expenses need to record as R&R expenses in the income statement.
The journal entry is debit R&R expense of $ 1,000 and credit cash with the same amount.
| Account | Debit | Credit |
|---|---|---|
| Repair and Maintenance Expense | 1,000 | |
| Cash | 1,000 |
The repair and maintenance will be present in the income statement while cash is deducted from the balance sheet.
Capitalized Repair and maintenance
Any repair and maintenance expense that increases the assets’ useful life or production capacity will be capitalized into the assets. It is the major repair that necessary to achieve otherwise assets will not be able to use.
Some assets are broken due to the accident so they are unable to operate. However, the company can spend some money to repair the assets and bring them back to life. Without such kind of repair, the assets will not be able to use and require write-off.
Some assets are reaching the end of useful life, however, repair and maintenance can extend the useful life beyond the original useful life. The repair cost may be lower than purchasing new assets so the company prefers to do so.
Moreover, the repair and maintenance can increase the asset’s capacity above the normal capacity.
These are the repair and maintenance which need to capitalize as the assets and calculate depreciation. Such kind of repair and maintenance usually have a high cost if compare to expenses.
Example
The repair and maintenance may require to capitalize as fixed assets if they fall under the following:
- Renovate a floor to change it from office to warehouse.
- Add pool to the building roof
- Replace pipe system of the building
- Overhaul the machinery to increase its useful life
- Repair the car after the accident
Accounting for Capitalized Repair & Maintenance
The capitalized repair and maintenance must be classified as the assets or part of the fixed asset in the balance sheet. The balance of capitalized repair must be depreciated over the assets remaining useful life.
Initial recording of capitalized repair and maintenance
| Account | Debit | Credit |
|---|---|---|
| Fixed Assets | 000 | |
| Accounts Payable | 000 |
Subsequent measurement of capitalized repair and maintenance
| Account | Debit | Credit |
|---|---|---|
| Depreciation Expenses | 000 | |
| Accumulated Depreciation | 000 |
Capitalized Repair and Maintenance Example
XYZ is a construction company that provides construction services to a variety of company. In January, company spend $ 20,000 to repair broken machinery and bring it back to life. Management estimate that it will increase the machinery life by 4 years. Please make a journal entry for this transaction.
This is a repair and maintenance that company spends to bring back the old broken machinery. It will increase the useful life for 4 years. So it should be capitalized as the assets.
The journal entry is debiting fixed asset $ 20,000 and credit cash.
| Account | Debit | Credit |
|---|---|---|
| Fixed Assets | 20,000 | |
| Cash | 20,000 |
It will increase the fixed asset on balance sheet while decreasing the cash.
At the end of the first year, this fixed asset needs to depreciate based on the useful life.
Depreciation expense = $ 20,000/4 years = $ 5,000 per year
The journal is the same as normal depreciation, it debits depreciation expense and credit accumulated depreciation.
| Account | Debit | Credit |
|---|---|---|
| Depreciation Expenses | 5,000 | |
| Accumulated Depreciation | 5,000 |
Repair and Maintenance Expenses Vs Capitalized repair and maintenance
| Repair and Maintenance Expenses | Capitalized repair and maintenance |
|---|---|
| The purpose is to keep assets operating at the optimal level. The company repairs the assets to keep them operate and it has nothing to do with the assets’ useful life. | The purpose is to restore assets’ value, increase the useful life, and increase the capacity. |
| Occur on a regular basic such as monthly, quarterly, or annual. It has nothing to do with increasing assets’ quality or restoring any significant damage. | Only happen when assets reach a certain condition or management wishes to increase assets’ original capacity. |
| The benefit generated from the cost incurred will not last more than 12 months. As it is a normal repair, it will not last any long time. | The benefit from cost will last more than 12 months. |
| Record as expense in the income statement. | Record as assets or part of assets in the balance sheet. |
FAQ
Is there any other example of repair and maintenance?
There are hundreds if not thousands of examples that we are not mentioning here. Most fixed assets can be repaired, so they are examples.
What is the impact of the wrong classification of repair and maintenance?
As we already know that repair can be the expense on income statement or the assets on balance sheet. If accountants do not classify them correctly, it will have a significant impact on the financial statement.
If repairs are wrongly classified as expenses, it will reduce the company profit and understate the company assets.
On the other hand, if they are wrongly classified as assets, it will increase the company profit as the expense is understated. At the same time, it also overstates the company assets. This is a critical part that most auditors and reviewers need to pay attention to. Most companies try to make their financial statements look better than they actually are.