When a firm spends money, it is either for the purchase of an ASSET (a CAPITAL expenditure) or the payment of an expense (a revenue expenditure). Capital expenditures are recorded by debiting some asset account, and as a result, capital expenditures are reflected on the BALANCE SHEET. Revenue expenditures are recorded by debiting some expense account, and as a result, revenue expenditures are reflected on the INCOME STATEMENT.
Ordinary repairs to equipment or other assets are normal expenses—that is, they are revenue expenditures. However, extraordinary repairs, such as overhauls and rebuilds, are capital expenditures. Rather than debiting an expense account for the extraordinary expenditures, the asset account for the item being overhauled or rebuilt is debited. Thus ordinary repairs are revenue expenditures and show up on the income statement as normal expenses, and extraordinary repairs are capital expenditures and show up on the balance sheet.
In accounting, “extraordinary” means both unusual and infrequent. Changing the oil and buying tires for the delivery truck are normal, usual expenses—that is, revenue expenditures. However, overhauling the delivery truck’s engine is both unusual and infrequent. This is a capital expenditure, and when this is added to the asset account for the delivery truck, this will increase the BOOK VALUE of the delivery truck.