Accounting for Repair and Maintenance (Journal Entry and More)

Repair and maintenance expense is incurred to keep business assets operational, it’s a routine expenditure, and this amount is expected to be significant for the companies with intensive machinery and equipment. On the other hand, repair and maintenance are limited for the companies operating in the trading and service sectors.

This expense must not be confused with the capital expenses that increase an asset’s life. Instead, these expenses are periodic and need to be incurred for efficient use of the equipment. Further, these expenses should be recorded in the profit and loss statement and need to be apportioned based on machinery usage.

For instance, if the machine is used for production by a business, related repair expenses need to be mapped in the cost of sales. On the other hand, if repair-related machines are used in the administration, these are mapped in the administrative expenses. Likewise, they can also be mapped in the marketing expenses based on the usage of machinery.

Journal entry for recording repair and maintenance expenses

Following entry can be posted in the accounting record for repair and maintenance.

Particulars Debit Credit
Repair and maintenance expenses XXX
Accounts payable XXX

The debit impact of the transaction is a recording of the repair and maintenance expenses in the income statement, and these expenses lead to a decrease in business profitability. On the other hand, the credit impact of the transaction is increase in the accounts payable.

When the business makes the payment for the accounts payable, the liability is debited, and cash paid is credited from the accounting books.

On the other hand, following journal entry is posted in the accounting record if the amount incurred on the repair and maintenance adds to the life of an asset.

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Particulars Debit Credit
Capital asset/Property, plant, and equipment XXX
Accounts payable XXX

The debit impact of the transaction is increased PPE as it has been capitalized, and leads to an increase in the long-term assets of the business. On the other hand, the credit impact remains the same as in the case of incurring expenses.

Further, the business needs to assess the useful life of the additional capital expense and depreciate in line with the useful life. It’s the same as normal depreciation of the assets.

Reporting under profit and loss statement

Expenses incurred for the repair and maintenance expenses are presented as a line item in the profit and loss statement. These expenses are expected to increase as soon as the machinery of the business gets older, and sometimes these expenses need to be capitalized as well.

It’s equally important to note that repair and maintenance expense is only capitalized when there is an expected increase in the life of asset/machinery. On the other hand, if there is no increase in the life of an asset/machinery, it needs to be charged in the profit and loss statement.

Examples of the repair and maintenance expenses

Following are some examples related to repair and maintenance expenses.

  1. Painting for the building.
  2. Cleaning of the office and factory floor.
  3. Periodic changes of the machine oil.
  4. Repair of the fuel pipe.
  5. Cleaning of the internal repair parts for tuning.

Examples of the repair and maintenance expenses leading to an increase in the asset life

Following are some examples related to repair and maintenance expenses that lead to an increase in the assets’ life and need to be recorded in the business’s balance sheet.

  1. Overhauling of the production facility leads to an increase in machine life.
  2. Addition of the swimming pool on the top roof of the office building.
  3. Addition of the new lift in the factory building.
  4. Extension of the production facility.
  5. Installation of the new pipes.
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Difference between repair expenses to be charged in the income statement and capitalized in the balance sheet

Repair and maintenance expenses to be charged in the income statement Repair and maintenance expenses to be capitalized
It’s incurred to keep the assets/machinery operational for usage. It’s incurred to enhance the life of the asset or to extend its base.
It’s a regular expense and needs to be incurred regularly. For instance, daily, weekly, quarterly, half-yearly, and yearly, etc. It’s not a regular expense and incurred when the management of the business opts to do so.
It’s directly recorded in the profit and loss statement. It’s recorded in the balance sheet of the business. Once an asset is used, it depreciates over the useful life.
The expected benefits of the cost incurred are expected to remain for not more than twelve months in total. The expected benefits from the cost incurred are expected to remain for more than one year/twelve months.
There is no need to revise the life of the assets, as an expense is directly charged in the income statement. The life of an asset needs to be revised as an incurred expense is added to the business’s asset base.

Audit importance of the repair and maintenance expense

Repair and maintenance expense directly impacts the profit for the business. If repair and maintenance expenses are higher, it leads to higher expenses and a decrease in profit.

So, the businesses can opt to charge the repair and maintenance expenses in the period even when these expenses increase the asset life. The incentive behind charging (repair and maintenance amount) in the profit and loss statement may be to report less profit and presume lower tax liability. Hence. Auditors need to assess adequacy of the recorded expenses.

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On the other hand, the business may opt to show a higher profit (to comply with certain provisions). In such a situation, the business management might choose to capitalize the asset when it does not increase the life of the asset. So, it leads to overstatement of the assets, understatement of the expenses, and overstatement of the profit.

The best check for the auditor is to review the amount of the repair and maintenance. If the repair and maintenance amount is significant, it might signal an increase in the life of assets. On the other hand, if the amount for the repair and maintenance is regular, it indicates expense for the profit and loss statement.

Another effective check is to analyze the break-up of the expenses. Further, expert opinion (to check if life of an asset increases) as audit evidence can also be collected to ensure the audit is conducted efficiently.

Conclusion

Repair and maintenance is essential business expense. It’s incurred in the normal run of the business-related assets, especially machines. It increases the efficiency of the business assets. However, it does not lead to an extension in the asset’s life. The repair expenses are charged in the income statement, and subsequent liability is created in the accounting record. However, liability is adjusted against cash in the future.

On the other hand, if there is an increase in the asset life, the amount incurred on the repair and maintenance is added to the assets and depreciated over the useful life. Further, repair and maintenance expenses can be mapped in the income statement based on their usage.

Examples of the repair and maintenance expenses to be charged in the income statement include regular machinery repair, and periodic oil changes, etc. On the other hand, the repair and maintenance expenses to be capitalized include having an extension of the factory floor, overhauling of the asset, and installation of additional machinery etc.

Frequently asked questions

Is the significant decline in the repair and maintenance expense a good indication?

A significant decline in the repair and maintenance expense can be justified when there is substantial disposal of the machinery. Otherwise, it’s not considered to be some logical analytic. Even the significant decline might indicate that the business has compromised on the long-term benefits by avoiding repair and maintenance expenses.

List four main types of repair and maintenance expenses?

Following are the four types of repair and maintenance expenses.

  1. Corrective repair and maintenance
  2. Preventative repair and maintenance
  3. Condition-based repair and maintenance.
  4. Risk-based repair and maintenance.

What’s the impact of classifying repair and maintenance expenses as capital assets?

The impact is an overstatement of the assets, overstatement of the profit, understatement of the expenses, resulting in the window dressing of the financial statement.