Theory of Repairs, Maintenance, and Betterments

Author(s): Earl A. Saliers

Source: The Accounting Review, Vol. 18, No. 3 (Jul., 1943), pp. 259-261
Published by: American Accounting Association
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 THEORY OF REPAIRS, MAINTENANCE,
AND BETTERMENTS
EARL A. SALIERS

THE NEED of an accounting for depre- There are three recognized methods of
ciation of capital assets is generally accounting for repairs:
recognized. The same understanding 1. Under the first plan, all repair costs are
as regards repairs does not exist. It is charged to current operations. This method
known, however, that depreciation and re- is almost universally used because of its
pairs are related; for, to establish a reason- simplicity.
able depreciation rate, it is necessary to 2. Under the second plan, repairs are esti-
consider the policy pursued.relative to re- mated, and provision for them is made in
pairs, since repairs affect the useful life of calculating the depreciation rate. When ac-
property. Proper treatment of depreciation tual expenditures for repairs are incurred
the reserve for depreciation is charged.
is not possible if a neglectful policy in re-
gard to repairs is pursued. Also an inade- 3. Under the third plan, repairs are appor-
quate depreciation policy is liable to render tioned to periods (months or years) in some-
attempt to treat re- what the same manner as is depreciation.
unsatisfactory any A schedule of estimated repairs which will
pairs scientifically. be required during the useful life of the
The word "repairs" has been used with asset in question is drawn up. The amount
so many varying meanings that its place in is then apportioned to accounting periods,
the terminology of accounting is question- on either a straight-line or a production
able. Sometimes it is used synonymously basis, by means of periodic adjusting en-
tries debiting Repairs account and credit-
with "maintenance"; sometimes synony- ing a Reserve for Repairs account.
mously with "renewals"; sometimes in a
sense different from either maintenance or An attempt will be made to evaluate the
renewals. three methods outlined above.
Reference to a number of industrial re- The first method, that of charging all
ports indicates considerable use of the term repairs to current operating expense, is
"maintenance and repairs." It seems that based on the theory of averages. In a given
the use of this expression is not the result business with equipment and buildings of
of careful reasoning but of the convention varying ages less is actually expended on
of convenience and a tendency to follow repairs for newer assets than on repairs for
established custom. The distinction be- older assets. Since the investment is fairly
tween repairs and maintenance is ex- distributed between new and old assets
plained by S. S. Wyer as follows: (since replacements are constantly being
Repair costs are expenses incurred to restore made) it is assumed that repairs are and
the operative efficiency of the plant, subsequent
will continue to be about the same in
to, or as a result of, a break in the plant.
Maintenance costs are expenses incurred for amount for each period. The validity of
renewals in anticipating, avoiding, or preventing this assumption may be questioned, how-
a breakdown. Maintenance costs are for pre- ever. Thus, Fabricant says:
ventive purposes, while repair costs are for re-
medial purposes.' For years prior to 1934 there is little informa-
tion on maintenance and repairs of industrial
1 Quoted by R. B. Kester in AdvancedAccounting
enterprises. Figures for 32 large corporations ob-
(New York: The Ronald Press Company, 1933), 3d
rev. ed., p. 16. tained from published reports suggest that

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260 The AccountingReview
charges for maintenance and repairs have fluctu-
ated violently.2
A repair made on a machine in the third
year of its life is as much attributable to
the first year of its operation as to the
third year; yet under the plan commonly
followed the entire expense of the repair
is borne by the third year. As to such prac-
tice Perry Mason says:
Logically there is no more reason for handling
repairs in this way than there would be in charg-
ing the cost of a building to operations of the
month in which it was acquired.3
The second method is in some respects
superior to the first. Under it a charge for
repairs is made a part of the depreciation
allowance and the two are indistinguisha-
bly merged. This is not good procedure,
since repairs are sufficiently significant to
tell an important story in the income state-
ment and should therefore be shown sepa-
rately.
Under the third method separate ad-
justing entries are made periodically for
(a) repairs and (b) depreciation. From a
theoretical point of view this is correct;
only practical considerations of basic im-
portance should be allowed to stand in the
way of its wider adoption.
Since there is no essential difference be-
tween the physical aspects of depreciation
and the physical aspects of repairs, essen-
tially the same methods should be followed
in accounting for both.
The third method obviates some of the
difficulties of the first method. Thus in
many businesses repairs are made during
the off season; in these cases, if the first
method is followed the months which
show the smallest income bear the heaviest
repair costs.
The chief criticism leveled at the third
method is to the effect that it is impossible
' S. Fabricant, Capital Consumption and Adjustment
(New York: National Bureau of Economic Research,
1938), p. 47.
' Principles o0 Public Utility Depreciation (Chicago:
American Accountine Association, :937), p. 23.
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to estimate repair costs, as distinguished
from the actual expenditures on repairs.
However, a check on past outlays should
aid in reaching a fair approximation; still
greater accuracy will be attained as experi-
ence data accumulate. Occasionally read-
justments may be necessary; but this is
equally true of estimates of accrued de-
preciation.
It may be well at this point to sum-
marize the reasons why repairs should be
distinguished from maintenance. Mainte-
nance chargestend to vary with operations;
repairs, on the other hand, result from
cumulative wear. Maintenance cost is a
current operating expense which should be
charged as actual expenditures therefor
are made. Too rarely is the item of repairs
shown separately in present-day financial
statements. This could be done if repair
costs were accounted for in accordance
with the third method. In support of this
contention, the following quotation is sub-
mitted:
If proper repairs are not made, the property.of
a going concern deteriorates to an extent not
covered by ordinary depreciation.... If the
repairs and maintenance accounts are unduly low
for the period under examination, the auditor
should endeavor to ascertain a fair average al-
lowance for such expense, and the deficiency
should be charged to operating expenses and be
offset by the setting up of a reserve account.4
Evidently, the repair policy pursued is
an important factor in determining the
depreciation rate; it is customary to as-
sume that repair expenditures will be suf-
ficiently large to keep the property in first-
rate condition. If a concern fails to do this,
not only is the useful life of the property
shortened; its output is reduced and its
operating costs increased. Neglected re-
pairs are commonly referred to as "de-
ferred maintenance." Such deferred main-
tenance may be implied if actual expendi-
I R. H. Montgomzry and W. A. Staub, Auditing
Principles (New York: The Ronald Press Company,
1923), pp. 176-177.
 Theory of Repairs, Maintenance, and Betterments
tures on repairs are not in proportion to
the production. Such a condition may indi-
cate a poor financial status; at any rate,
larger costs are incurred when it becomes
necessary to make good such deferred re-
pairs. The facts will be understood only
when repairs are accounted for separately
in such a way as to make possible a com-
parison of accrued repairs and actual ex-
penditures on account of repairs. The third
method goes far towards providing all in-
formation needed for the formulation of an
intelligent policy.
The words "additions, "betterments,'
and "renewals" are used hiterchangeably;
so are "maintenance," "repairs," "re-
placements," and "upkeep."
Any change made in plant or equipment
makes it necessary to decide whether the
expenditure in question benefits only the
current fiscal period or future periods also.
If it benefits only the current period it is a
revenue expenditure and should be
charged to current operations, directly or
indirectly. If future periods benefit, the
expenditure should be capitalized.
The Interstate Commerce Commission
defines additions as "structures, facilities,
and other properties added to those in
service at the time of addition and not tak-
ing the place of any of like property pre-
viously held by the company."' Additions
increase the physical dimensions of plant
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261
either in size or in productive capacity.
Improvements in plant and equipment
benefit future periods as well as the period
in which they are made, hence they should
always be charged to the proper asset ac-
count.
"Betterment" is a broader term than
"additions." Any physical improvement in
a property is a betterment. Betterment is
defined by the Interstate Commerce Com-
mission as "physical changes in structures,
facilities, or equipment which have as
their primary end or result the making of
the property affected more useful, or of
greater capacity than it was at the time of
the installation or acquisition."'
These definitions may not be the last
word; they are presented as merely indi-
cating the trend of present-day thought as
regards additions and betterments.
As distinguished from additions and
betterments, repairs render a machine bet-
ter than it was immediately before such
repairs were made; yet they do not con-
stitute a betterment, because they do not
lengthen the life of the machine and do not
make it essentially more serviceable. Re-
pairs prevent the loss of service which a
machine normally possesses, and result in
more efficient operation, both present and
future.
5 Quoted from J. H. Bliss, Management Through
Account, (Ronald Press, 1924), pp. 28, 281.