Provisions For Repairs and Renewals

Most of the fixed assets used by a business enterprise with the possible exception of land require regular expenses for the purpose of repairs and maintenance. Sometimes some of the parts may have to be replaced because of wear and tear. In the initial stages the amount required for repair maintenance is normal but towards the end of the useful life of the assets, it is very heavy. A business enterprise may follow the practice of charging the actual amount spent on repairs to the profit and loss account. It would mean that, other factors remaining same, the profit would be higher when the asset is new and lower in the later years of an asset’s life. Although written down value method is suitable to tackle this problem yet it may fail in its objectives if the expenses on repairs etc. are exceptionally large. In order to ensure a smooth measurement of income, many business establishments create a special reserve called provision for repairs and renewals also known as Repairs and Renewals Reserves. The purpose is to ensure a uniform charge against revenues until the useful life of the assets. A fixed amount is added every year to this provision by debiting profit and loss account. The amount is determined by estimating the total amount to be spent on repairs and renewals during the useful life of the asset and dividing it by the numbers of years of its useful life. The accounting entry is:

Profit and Loss Account                    Dr.
    To Provision for Repairs and Renewals Account

The amount actually spent on repairs and renewals is charged to the provision account with the help of the following entry:

Provision for Repairs and Renewals Account        Dr.
    To Repairs an Renewals Account

The balance in the ‘Provision for Repairs and Renewals Account’ will appear in the balance sheet on the liabilities side (if the balance is in credit). Any balance in the Provisions for Repairs and Renewals Account is transferred to profit and loss account on disposal or sale of the asset.

(i)    In the beginning, ‘Provision for Repairs and Renewals Account’ would show a large credit balance but as actual repairs begin to exceed the annual credit to the provision account, the credit balance would begin to diminish gradually and towards the end of the life of the particulars asset, the provision account shown only a small credit or debit balance.

(ii)    In case heavy repairs are carried out in an accounting period because of special circumstances, it is suggested to charge the amount of such heavy repairs separately to the profit and loss account.

(iii)    Profits for the purpose of managerial remuneration and taxable profits are always based on the basis of the actual amount on repairs and renewals rather than the amount charged to profit and loss account every year in the form of provisions.

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