If an improvement increases the useful life of the asset (fancy weather-resistant shingles on a roof, for example), you should decrease the accumulated depreciation account to record the value of the extraordinary repair expenditures. Extraordinary repairs are capitalized, which means the repair cost increases the book value of the fixed asset that was improved as a result of the repair. The extraordinary repairs accounting extraordinary repair cost may be added to the original fixed asset or it could be identified as a separate fixed asset item directly underneath the original, in order to keep clean accounting records.

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In order to adequately maintain the docks and provide safe storage for its boats, ABC must routinely replace rotten or damaged boards on the docks. These costs are incurred as part of general maintenance and do not extend the life of the dock at all. This would be an ordinary repair, and the accountants at ABC would record the transaction as a debit to repairs expense and a credit to the cash balance. According to generally agreed accounting principles (GAAP), extraordinary repairs are generally capitalized if the useful life is increased by more than a year. It may be more practical from an accounting perspective to record the cost of an extraordinary repair as a separate fixed asset, which makes the fixed asset records easier to understand. Otherwise, a fixed asset record might include a series of additions, each one for the expenditures related to a separate extraordinary repair.

Understanding Extraordinary Repairs

All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. According to this article, it is to trace and record the cost of an asset in relationship to its useful life. However, the distinction is important because it affects how income in current and future periods is viewed. Ask a question about your financial situation providing as much detail as possible.

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1. In order to adequately maintain the docks and provide safe storage for its boats, ABC must routinely replace rotten or damaged boards on the docks.
2. Examples of extraordinary repairs are a new roof for a building, a new engine for a truck, and repaving a parking lot.
3. In the case of plant and equipment, revenue expenditures usually are called repairs and maintenance.
4. The cost of extraordinary repairs should be included in the cost of the fixed asset that was repaired, and depreciated over the revised remaining life of the asset.

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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. 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. The distinction between capital and revenue expenditures is often hazy, depending on the accounting policies developed by management. On the other hand, assume that ABC Boating Company has decided to overhaul one of its lines of boats. Twenty of the boats’ older engines are swapped out for new, more powerful engines. The new engines are predicted to extend the useful life of the boat for an additional five years.

Similarly, if a machine’s expected life is only prolonged by a few months, it is more prudent to expense the repair cost. As a result of this transaction, ABC’s accountants will debit (increase) their fixed asset account and credit accounts payable (AP) by $400,000. The fixed assets on the balance sheet will show this increase in value immediately in the current accounting period.

With the new engines that extend that life by five years, the boats now have a remaining useful life of 10 years. The increase in value to the fixed asset will add an additional $40,000 ($400,000 increase in value / 10 years) to each year’s depreciation expense. This additional cost will flow through to the income statement over the course of those 10 years.