Factory equipment will need to be repaired from time to time, and more frequently when it is being heavily used. When a repair is conducted, there are two ways to account for it, which are based upon its effect on the equipment. The alternatives are as follows:

Charge to overhead. If the repair merely returns the equipment to its normal operating condition (which is the case most of the time), charge the cost of the repair to factory overhead, which is a cost pool. Then, at the end of the accounting period, all of the factory overhead costs are allocated to the units produced in that period. The net result is that some of the units are still in inventory at the end of the period, and so their cost will be reported as an asset, and will appear on the balance sheet. Or, if the units were sold during the period, their cost will appear in the cost of goods sold on the income statement. Once the inventoried items are sold in a later period, the equipment repair cost allocated to them will be charged to expense.
Capitalize the cost. In a few rare cases, a repair will prolong the useful life of factory equipment. If so, capitalize the cost of the repair and depreciate it over the life of the equipment. However, only capitalize the repair cost if the expenditure amount is equal to or greater than the company's capitalization limit. If not, charge it to expense as incurred. The capitalization limit is imposed to keep paltry expenditures from being tracked over a long period of time. The capitalization of repair costs is unusual, and should be cleared in advance with the company's auditors to prevent disputes over the classification of these costs during the annual audit. When in doubt, it is likely that these costs should be expensed.

Best Practice for Equipment Repairs Accounting

You will usually want to charge the cost of repairs to expense in the period incurred, in order to reduce the amount of taxable income reported. Capitalizing these repairs will defer recognition of the expense, resulting in the payment of more income taxes in the current period. To reduce the amount of capitalized equipment repair costs, set the company’s capitalization limit relatively high, so that very few repairs will be capitalized.