Repairs and Improvements

Expenses relating to depreciable assets fall into two broad categories: ordinary expenditures and capital expenditures. Ordinary expenditures include normal repairs, maintenance, and upkeep. The costs associated with these items are considered normal operating expenses, and they are recorded by debiting expense accounts and crediting cash or another appropriate account. Capital expenditures increase an asset's usefulness or service life, and they are recognized by increasing the asset's net book value.

There are two ways to increase an asset's net book value: the asset account can be debited, thus increasing the recognized cost of the asset, or the asset's corresponding accumulated depreciation account can be debited, thus decreasing the amount of depreciation previously allocated to the asset. If the capital expenditure serves primarily to increase the asset's usefulness or value, the asset account should be debited. On the other hand, if the capital expenditure serves primarily to increase the asset's useful life or salvage value, the accumulated depreciation account should be debited. Such judgments are not always clear cut, and discussions about the best way to record capital expenditures are usually covered in more advanced accounting courses. Nevertheless, you should be prepared to see capital expenditures recorded in either the asset account or the asset's accumulated depreciation account, and you should recognize that the effect on the asset's net book value is the same either way. Consider how a $10,000 capital expenditure changes the truck's net book value.

Before Capital Expenditure

After $10,000 Capital Expenditure

Asset Account Debited

Accumulated Depreciation Debited

Cost

$90,000

100,000

90,000

Accumulated Depreciation

(64,000)

(64,000)

(54,000)

Net Book Value

$26,000

36,000

36,000

When capital expenditures are made, the revised net book value must be used to calculate depreciation expense in subsequent accounting periods.