Booking something as an asset or an expense is not always black or white. There are many gray areas in accounting. It’s easy to know that a car or a building is an asset, but what about routine repairs to that car or building? When is it an expense, and when should those repairs be added to the cost of that asset (capitalized)?
As discussed with prepaid assets and unearned revenue, such routine repairs would always be considered an expense if it would only affect the current period of time. For instance an oil change would always be an expense, since it affects the car right then to help it run better. It could conceivably increase the useful life of the automobile but not increase its worth.
Improvements are Assets not Expenses
On the other hand if the engine died and had to be replaced, this would probably increase the car’s life as well as its worth. So the engine expense would be capitalized. The best self check is to ask yourself if the expense only affects the current period of time or if it will be an ongoing use for a year or more. Is the cost an improvement or merely a repair or maintenance charge?
Since an oil change has to be done every few months, it is obviously a current period expense. But a new or rebuilt engine would logically be expected to last for several years. So that expense would be added to the cost of the car. [Read more…] about When Expenses are Capitalized as Assets