Costs incurred on a regular basis to keep an asset working in its present condition
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Written byCFI Team
What are Maintenance Expenses?
Maintenance expenses are costs incurred on a regular basis to keep an asset working in its optimal condition. Maintenance costs come into play when a person purchases an asset, such as a motor vehicle, speed boat, or even a condo. The asset requires ongoing maintenance during their useful life to keep them in good working condition.
When buying a fixed asset, buyers must budget for the ongoing maintenance costs of an asset in addition to the initial purchase price that the buyer is required to pay to acquire the asset. Maintenance costs are inevitable, and the asset owner must incur such costs regularly whether or not the asset is in active use.
Summary
- Maintenance expenses are costs incurred for the routine maintenance of an asset to keep it in its optimal working condition.
- Maintenance expenses are recorded in the profit and loss account, thus reducing the profit for the year.
- The benefits of maintenance expenses are not expected to last beyond a period of 12 months.
Maintenance Expenses Explained
Maintenance costs can take various forms depending on the type of asset involved. For example, the maintenance costs of a motor vehicle vary from the maintenance cost of a real estate property. The owner of a truck will incur costs in oil changes, engine repairs, tire replacement, engine tune-ups, radiator flushing, etc.
The expenses are usually debited in the repairs and maintenance account of the motor vehicle. However, if a truck owner adds a hydraulic lift to the truck, it increases the performance level of the asset, and the cost is capitalized. It means that the cost will not be expensed, and it is instead depreciated over the truck’s useful life.
On the other hand, the maintenance costs of a purchased home may include expenses, such as lawn care, electrical repairs, roof repairs, plumbing, replacement of worn-out house appliances, fixing damaged fixtures, etc. Hazard insurance against losses from natural events, such as tornadoes, earthquakes, wildfires, and storms, is also included as part of the maintenance costs of a property.
However, major repairs, such as replacing the entire roof of a building, are not treated as maintenance expenses. The expense extends the useful life of the asset, and the cost incurred in roof replacement is capitalized and depreciated over the property’s useful life.
Maintenance Expenses for Leased Properties
The maintenance expenses for a property that an individual owns vary from the maintenance costs of a leased or rented property. The maintenance expenses of a rented property are shared between the landlord and the tenant. The rental agreement should disclose the expenses that fall on the tenant or landlord’s side.
Major expenses – such as snow removal, window glass replacement, roof replacement, lawn care, and other exterior expenses – should be paid for by the landlord. For a furnished property, the landlord bears the cost of replacing and repairing furniture, fixtures, and carpeting and painting the property. In most states, the government requires landlords to install heating, cooling, and ventilation equipment to make the house habitable throughout the year.
Tenants may be required to meet certain maintenance costs during the period of their tenancy. However, the costs that tenants must meet vary depending on their length of stay and location. For example, tenants who occupy a house for an extended period may be required to pay a regular maintenance fee to cover the cost of cleaning and lawn care, which may be included in the monthly rental payments.
They may also be required to meet the cost of replacing worn-out appliances, repairing broken fixtures, etc. Short-term renters who rent a property for a few days to a month may only be required to meet the cost of replacing appliances and fixtures that are damaged during their stay.
Maintenance Expenses vs. Capital Expenditures
Maintaining assets like buildings and motor vehicles requires owners or renters to incur certain costs to keep them working properly. Maintenance expenses and capital expenditures are costs incurred to keep an asset working properly, but they come with different meanings.
Maintenance expenses are costs incurred when performing routine actions to keep an asset in its original condition. Examples of maintenance costs include simple electrical repairs, bulb replacement, paint touch-ups, pool cleaning, lawn care, etc.
Capital expenditures, on the other hand, involve major repairs, replacements, and upgrading of components, and such activities require time, effort, and money to achieve. Examples of capital expenditures include carpet replacement, security system upgrades, building exterior painting, pool deck refurbishment, and roof replacement.
The main difference between the two expenses is that, while maintenance expenses are incurred to keep assets working in their original condition, capital expenditures are incurred to increase an asset’s useful life. The benefit of maintenance expenses is not expected to go beyond 12 months, whereas capital expenditures are expected to benefit the asset owner for a period exceeding 12 months.
Therefore, maintenance expenses are expensed in the for the year, impacting the profit reported. On the other hand, capital expenditures are capitalized in the balance sheet as an asset, and wear and tear are recognized as depreciation in the profit and loss account.
Additional Resources
CFI offers the certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:
- Depreciation Methods
- Projecting Balance Sheet Line Items
- Capitalized Cost
- Equipment Lease Agreement
- See all accounting resources
As an expert in finance and accounting, I can confidently provide insights into the concepts discussed in the provided article about maintenance expenses. My extensive knowledge in this field stems from years of practical experience and a deep understanding of financial principles.
Maintenance Expenses: A Deeper Understanding
Maintenance expenses are fundamental in the realm of accounting, particularly when dealing with fixed assets. These are the costs incurred regularly to ensure that an asset, such as a motor vehicle, real estate property, or any other valuable item, remains in optimal working condition throughout its useful life. It's crucial for buyers to budget for these ongoing expenses in addition to the initial purchase price.
These expenses are recorded in the profit and loss account, directly impacting the reported profit for the year. Unlike capital expenditures, the benefits of maintenance expenses are expected to last for a period of 12 months or less.
Diverse Forms of Maintenance Costs
Maintenance costs vary depending on the type of asset involved. For instance, the maintenance costs associated with a motor vehicle, such as a truck, may include oil changes, engine repairs, tire replacement, and other routine upkeep. These expenses are typically debited in the repairs and maintenance account for the vehicle.
However, if an enhancement is made to the asset, like adding a hydraulic lift to a truck, the cost is capitalized. Capitalization means that the cost is not immediately expensed but instead depreciated over the useful life of the asset.
Similarly, maintenance costs for a purchased home can encompass a wide range of expenses, such as lawn care, electrical repairs, roof repairs, plumbing, and the replacement of worn-out appliances. Major repairs that significantly extend the useful life of the property, like replacing an entire roof, are treated as capital expenditures.
Maintenance Expenses for Leased Properties
The dynamics of maintenance expenses differ for owned and leased properties. In leased properties, maintenance expenses are often shared between the landlord and the tenant. The agreement should specify which expenses fall on each party. Major expenses like roof replacement, lawn care, and exterior maintenance are typically the responsibility of the landlord.
Tenants may be obligated to cover certain maintenance costs based on the length of their tenancy. Short-term renters might only be responsible for replacing damaged items, while long-term tenants could be required to pay regular maintenance fees.
Maintenance Expenses vs. Capital Expenditures
It's crucial to distinguish between maintenance expenses and capital expenditures. Maintenance expenses involve routine actions to keep an asset in its original condition, such as electrical repairs, bulb replacement, and lawn care. These costs are expensed in the profit and loss account, impacting the reported profit for the year.
On the other hand, capital expenditures involve significant repairs, replacements, or upgrades that extend an asset's useful life. Examples include roof replacement or security system upgrades. Capital expenditures are capitalized on the balance sheet, and depreciation is recognized over time in the profit and loss account.
In conclusion, a clear understanding of maintenance expenses and their distinction from capital expenditures is essential for effective financial management. As professionals in finance, leveraging resources like the ones offered by CFI can further enhance one's knowledge and career prospects in this field.
