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.

Frequently Asked Questions

What is the primary reason for capitalizing expenses?

According to this article, it is to trace and record the cost of an asset in relationship to its useful life.

If a company purchases a new machine and it costs $120,000, would this expense be recorded as revenue expenditure or capital expenditure?

This would be a Capital Expenditure because the company has purchased something that will increase production and extend its useful life.

What type of expected benefits does a company derive from revenue expenditures?

A company expects to use up or consume the product or service derived from Revenue Expenditures; therefore, they do not expect it to last long term.

How is a repair and maintenance expenses recorded?

Repairs and Maintenance (i.e., the expense account) or a similar account is credited for recording these expenses.

How are capital expenditures made after an asset is purchased recorded?

Capital Expenditures (additions, betterment, extraordinary repairs) are debited to it's corresponding asset account. The asset's book value increases by the amount of Capital Expenditure and Depreciation is revised to show the cost recovery.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

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