Subsequent expenditures made on property, plant, and equipment may be in the form of either capital expenditures or revenue expenditures.
The distinction between capital and revenue expenditures is often hazy, depending on the accounting policies developed by management. However, the distinction is important because it affects how income in current and future periods is viewed.
Accounting for Revenue Expenditures
Revenue expenditures are expenditures whose benefits are used up or consumed in the current period.
In the case of plant and equipment, revenue expenditures usually are called repairs and maintenance.
Technically, a repair or maintenance is an expenditure that maintains the asset’s expected level of service or output and neither extends its useful life nor increases the quantity or quality of its output.
These expenditures are expensed in the current period by debiting Repairs and Maintenance (i.e., the expense account) or a similar account.
Accounting for Capital Expenditures Subsequent to Purchase
Capital expenditures are those that benefit several accounting periods.
In terms of plant and equipment, capital expenditures made after the purchase of an asset are considered additions, betterments, or extraordinary repairs.
- Additions are enlargements, such as the addition of a new wing to an existing plant
- Betterments are improvements to existing assets, such as the installation of a computer-controlled temperature monitoring system in a department store
- Extraordinary repairs are a major reconditioning or overhaul of existing assets, such as a major overhaul or the installation of a new engine
Regardless of how these expenditures are described, they either extend the asset’s useful life or increase the quantity or quality of its output.
Accounting for these expenditures is often accomplished by debiting the asset’s Accumulated Depreciation account or, in the case of an addition, debiting the asset account itself.
In either case, Cash or an appropriate liability account is credited. The asset’s book value increases by the amount of capital expenditure and the subsequent depreciation expense is revised.