Definition of Replacements, Renewals, Maintenance, etc.
Only after the concern becomes a revenue-producer is the chief difficulty encountered in determining the proper record as between capital and revenue. In all cases of new construction and additions to the existing plant or equipment, no question arises as to the legitimacy of such capital charges. But when replacement, renewal, or betterment of existing properties take place, difficulty is met in determining the portion chargeable to the asset and the portion to be charged against revenue. The dividing line between renewals and repairs, maintenance, and up-keep is a closely drawn one, and usually an arbitrary working rule suitable to conditions must be adopted by each concern. R. P. Bolton[11] gives for some of these terms very suggestive definitions which the author quotes in full:
“Maintenance is a process of continuous attention to, and supply of, operating necessaries, including solicitous observation of the condition of the object cared for, corresponding to the protecting shelter, clothing and food supplies to living beings, in order to maintain their functions in operating condition. It includes supplies which form part of the food of the appliance. Part of the labor in attendance on machinery is involved in this element of its care.
“Up-keep is a course of partial recreation, involving the expenditure of time and money in anticipating causes of decay, of failure, or of possible injury to the object under care, corresponding to hygienic and recreative methods, often involving considerable expenditures without apparent direct results, which are or should be followed in safeguarding the general health and strength of human beings. Thus, welfare and recreation of employees is a justifiable expense of an industry. It is part of the cost of the human machine.
“Repair is the course of partial reconstruction, replacement, or renewal of worn or of injured portions, after the necessity therefor becomes apparent, and, unless brought about by accident, the need for the process is brought about by the failure or inability of maintenance, and also of up-keep, wholly to arrest the progress of decay by age or continued use. Provisions to preclude accident or to cover the cost of its results are part of the cost of repair. Health insurance of employees is a repair cost paid in advance.”
While these definitions were not intended for accounting purposes and are not fully applicable thereto, they call attention to the basic ideas of the terms. The distinctions are in some cases too finely drawn. For accounting purposes the title “maintenance and repairs” usually gives sufficiently detailed information. Repairs is a part of the process of maintenance, as is also renewals. Maintenance, from an accounting standpoint, may be defined as “the act of keeping a property in condition to perform adequately and efficiently the service for which it is used.” A. Lowes Dickinson[12] defines repairs and renewals as follows:
“Repairs. This should include all current expenditures recurring from day to day and from month to month on the general up-keep of the existing property without the renewal of any substantial part thereof, and generally all periodic repairs which are necessarily undertaken within, say, one year.
“(This caption will, of course, include certain renewals of small parts, etc., such as would be necessary to continue the useful life of any unit of building, plant, or machinery over the estimated period of its life.)
“Renewals. This should include all expenditures incurred in renewing, in whole or in part, any unit of building, plant or machinery, which tend to extend its useful life beyond the average term. These expenditures would in general be those which would only occur at long intervals of two or three years, and whose effect would last for a number of years afterwards.”
As distinguished from renewals, a replacement may be defined as “the act of replacing a plant unit which is going out of service, with a substitute which may be either identical with the unit replaced or different from it.” In accounting terminology the terms “renewals” and “replacements” are for the most part used synonymously and will be so used here.