Ordinary repairs, also known as revenue expenditures or income statement expenditures, are routine maintenance and minor improvements done to keep assets in operating condition. These repairs do not materially increase the value of the asset or prolong its useful life, but simply maintain the asset’s current condition.
Expenses for ordinary repairs are considered a part of operating expenses and are recorded on the income statement in the period they are incurred, in accordance with the matching principle of accounting. This is because these costs are considered necessary for a company to continue operations and generate revenues during that period.
Examples of ordinary repairs include:
- Regular maintenance services (like oil changes for vehicles).
- Small parts replacements.
- Repainting and minor improvements to a building.
- Routine cleaning services.
- Repairing a broken window.
These costs contrast with capital expenditures, which are costs that improve the asset or extend its life beyond the original estimate. Capital expenditures are added to the asset’s value on the balance sheet and depreciated over the asset’s useful life.
Example of Ordinary Repairs
Let’s consider a transportation company that owns a fleet of trucks. These trucks need routine maintenance and occasional minor repairs to keep them running efficiently.
- Oil Changes: To keep the engines running smoothly, each truck might require an oil change every 3,000 miles. The cost of these oil changes is considered an ordinary repair expense.
- Tire Replacement: After a certain amount of wear, the tires on the trucks need to be replaced. The cost of replacing worn tires is another example of an ordinary repair expense.
- Minor Engine Repairs: If a truck breaks down and needs minor engine repairs to get it back on the road, this cost is also considered an ordinary repair expense.
These expenses do not extend the useful life of the trucks beyond their original estimate nor do they improve the trucks’ value, but rather maintain the trucks’ current operational condition. Therefore, these costs are considered ordinary repairs, and are recorded as expenses in the income statement in the period they are incurred.
On the other hand, if the company decided to overhaul all the engines in its trucks to more efficient models, this would likely be considered a capital expenditure, because it improves the asset and could potentially extend its useful life. The cost would be added to the value of the asset on the balance sheet and depreciated over the asset’s useful life.