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Ordinary Repairs vs. Capital Improvements

Brian Krogol
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So once we're already owning and using a fixed asset, well, we're gonna have to maintain it, we could also spend more money to modify it or expand its useful life. Let's check it out. So we're gonna be talking about ordinary repairs versus capital improvements here. So an ordinary repair. Well, this is standard maintenance, standard maintenance costs, maybe an oil change for a truck, right? Things like that that you just kinda have to do to just keep it running. Well, these are expenses, right? These are expenses to the income statement when we have ordinary repairs. Well, you have to take these on, you're just gonna expense them as they come along. But what about a capital improvement? This is a more significant project. You're modifying the vehicle or you're going to modify whatever the fixed asset. And in general, it's going to do something that's going to extend the life of that fixed asset. Okay, So these capital improvements, we're not just gonna expense them right away to the income statement, We're gonna capitalize them to the balance sheet. And when we use this word to capitalize something where we're gonna capitalize it, it's not going to just say, oh, let's put an upper case letter in the front, capitalizing it is to send it as an asset. We're creating an asset on the balance sheet. And usually what we're gonna do, let's say if it's a truck and we modified the truck, what we're gonna do is we're gonna add whatever we spent to the value of the truck. So we're gonna increase the value of the truck. You know, if it's a debit an asset on our balance sheet, well, we're going to increase that asset with this capital improvement. Okay, so let's check out this example. Let me show you what I mean. So we've got ordinary repairs and capital improvements. Okay, so let's see which one each of these fall into. A company has owned a machine for several years. During the current year, the company spent $150 to grease the gears of the machine. The company replaced several worn gears in the process at a cost of $500. The company also modified a segment of the machine to improve the capacity of its output at a cost of $2000 journal eyes these transactions. So let's go ahead and let's treat them one by one. So the first one was the grease. Right? We're gonna grease the machine. Well, when we grease the machine, this is standard maintenance, right? We need to lube these these gears to make them work to make the machine work. This is a standard expense. So this would be something like maintenance, expense, maintenance, tough word to spell there. Got it, maintenance expense, $150. And let's say we just paid for all of these things with cash, cash, $150. Right? So that's for greasing the machine. We would have just had a maintenance expense and that would have gone straight to the income statement. How about the next one? The company replaced several worn gears in this process at a cost of $500 this one seems a little trickier, right? Sometimes it gets a little tricky. Is it a capital improvement? Is it an ordinary repair? Well, this isn't doing anything to really extend the life of the machine. Yes, we could say that if we didn't change these gears, well then the machine wouldn't run anymore, but we would probably be expected to have to change these gears over its useful life to make sure he kept working properly. Right. This is just a small change. We're not really modifying the machine in any grand way. You can usually tell when it's a capital improvement. It's going to be something more significant here. We're just replacing a few gears. This is going to be an expense as well. Okay, so this will be the gears I'll put right here underneath and we're gonna have something similar maintenance expense. And this one was $500. And again, we'll just pay for it with cash. 500. Now, how about this last one? The company also modified a segment of the machine to improve the capacity of its output at a cost of $2,000. Notice the wording here a lot different than the other ones. Right? The other ones seemed pretty plain and simple. Pretty ordinary. Ordinary repairs. While this one we're modifying a segment of the machine, improving the capacity, right? The word choice here, That's what we really want to be analyzing and looking for. So when it's a capital improvement, it's going to be something like this. We're modifying the machine improving the capacity. This is definitely a capital improvement here. So this will be the modification. And remember when we do a modification, we're gonna capitalize it to the balance sheet. So what do you think the journal entry is gonna look like here? We're not gonna debit maintenance expense in this case. What do you think? We're going to debit? We're going to debit the machine, Right. We're going to debit machinery because we're putting it onto the balance sheet. This extra money that we spent on this machine. That's gonna improve its capacity. Well, that's going to be created as an asset and then that'll be depreciated over the useful life of the machine. Okay, So this is still gonna be eventually going to the to the income statement as depreciation expense, just like as we do with with the cost of the machine. Okay. And then we're going to credit cash, right? Because we paid for this with cash. Okay, so that's the difference there when we've got a capital improvement? Well, it's going to increase the balance of the asset itself, compare that to those ordinary expenses that just go straight to the income statement as an expense. Alright, let's go ahead and pause here. And you guys try and practice and categorize some stuff as ordinary or capital. Alright, let's check it out.