Spreading cost of car repair

Expense must be recorded in the period it occurred.

"jay" wrote

Individuals are conaisered to be cash basis taxpayers, so making small monthly payments would work. Course, your car is still in the repair shop or popped on a mechanics lien.

Don't they all say that?

Thanks for the responses. A few additions to my original post:

- For my personal use, I'm using "accrual basis" accounting (or some amateur variant)

- My (mis)understanding of accrual accounting: If I buy two months worth of breakfast cereal at the beginning of June, then I expense half of it in June and half in July. If I buy a car, I spread the expense over it's useful life (minus estimated salvage value), etc. I consider car repair to be a general car expense similar to a car payment. It's silly to say I spent an extra $1,100 on auto transportation in June (must've driven a lot!). I can pretend it's a capital expense (or whatever) and depreciate it over the next year...but I see no evidence that other people do that. I assume the world has thought about it and come up with a solution backed with solid reasoning and I'm wondering what that is.

Thanks again,

Jay

Car repairs are to fix past wear and tear, not future!

You should expense the actual repair so far. You can accrue for future repairs by estimating the repairs for the next twelve months and then expensing one twelfth each month. When the actual bills come in charge them to the accrual account. You can adjust your accrual as you go.

Seeing this is for your personal use you can make up the rules as you go :-)

Cheers, Rusty

it's also called putting bills on a credit card and paying the minimum monthly balance

But what if the repair taking place now is a major one, say installing a new engine... this will effectively increase the life of the car and its value.

Might increase the life of the car. I doubt the value would increase. Still an old piece of junk.

A little odd for an individual to be on an accrual basis.

But the first thing is that you're depreciating your car. As an asset, it costs what you paid for it. Estimate the lifetime and salvage value, and it's probably easiest to use straight-line deprecation, which means a fixed amount comes off each period (each month, etc.). So you'll have an account for Car, and an account for Accumulated Depreciation-Car, and the car will have a book value of the purchase price minus depreciation.

When you make repairs, you can add that to Car as if it were an asset (and decrease Cash-- net change in assets = zero), decide if you want to re-estimate its lifetime, and adjust the monthly depreciation so that the book value will still hit the salvage value in the given time. The account Car doesn't track what someone else would pay you for it, it tracks the money you put into it.

Or just expense the repair immediately. If it's a $300 repair on a car you paid $30,000 for, expensing or amortizing it really wouldn't make much difference in representing your financial position. You shouldn't get too fancy unless it makes a difference.

Bah!...wait, no, you're right.

Perfect. That's exactly what I was looking for. Thanks very much.

(For the record, I think I'll go with 12 months into the future since I consider the repair to be essentially "buying a car for the next twelve months." I'm also more comfortable with the uncertainty of how long the car will last vs. guessing how much the repairs will cost.)

Thanks again,

Jay

Just like a business, I want the numbers to reflect my (spending) performance, not whether I'm buying stuff in advance.

decide if you want to

Excellent. I think that's what I'll do.

Thanks very much for the detailed response.

Jay

What you're talking about is a capital improvement. Repairs and maintenance are considered routine activities, rather than something which extends the life of the capital asset. So, things which are replacements of normal wear and tear, or the result of an accident are not capital improvements. If you did something like dropped a new engine in which gave the vehicle an extra 5 years of life, THAT could be depreciable/capitalized.

Car payments and repairs are different classes of costs. The payment is a reduction of the car loan... so it is debt extinguishment on an asset whose useful life is greater than one year or a business cycle. Do you understand that paying the loan down and depreciating the vehicle are different things? You could determine that the car will have a useful life of 10 years, but the loan will be paid off in 5. Different timeframes in that case.

Repairs do not meet that qualification... ESPECIALLY if the mechanic says "that'll add another year onto it." If it only lasts an additional year, then you only have one year to expense it in... can't spread it out over multiple periods.

If you don't mind saying, what was the nature of the repair work, and how much was it for?

-Holly

Hmmm...you're making things complicated, Holly! My parents gave me the car a while back, so I haven't considered all the issues with depreciating a capital item that you're making payments on, or how exactly depreciated-repair would combine with existing depreciation if the repair didn't extend the lifespan of the car (or the difference between a regular repair vs. a life-extending repair since the car always dies without the repair).

It seems that my idea of spreading an expense over multiple periods may not mesh with standard accounting. When I decided to buy the repair I did so because I would (probably) reap the benefits for a year, i.e. I purchased a year's worth of auto use (gas, etc. aside). If I bought a year's worth of breakfast cereal, I would spread the cost evenly over 12 months. It would be silly to say my cereal expense took a huge leap in June then went to zero the rest of the year, since I would consume the same $$$ amount of cereal every month (which is what I want the numbers to reflect). I could easily just enter it into my little accounting spreadsheet that way, but I wanted to see how other people treated car repair...and Google gave me nothing. I'm having a similar problem with other expenses, come to think of it. E.g., if I buy a television set, I think I should spread the cost over the expected lifetime...and I'll probably do it that way, but it seems like that would understate my expenses. (I'll have cash flow reports too, so that kinda makes up for it).

The rear brake pads had locked up or something...it cost over $1,100. (There may have been some other problems as well.)

Hope this wasn't too long. Thanks for responding.

Jay

"jay" wrote

If there is no guarantee, then the car might die tomorrow, and the claim that "it should last another year" is bogus.

You can do whatever you want. It's your personal accounting. Except to say that your numbers for all other months are skewed for the single event that might happen again, or might not ever happen. You'll have 12 months of higher "auto" expense for no valid reason.

Consider creating a "repairs" category and plug it there. Then your auto expenses are legit and can be compared to all other months or years. The single event of a repair will stand on it's own. Then if you see (because it's in it's own line item) that you have vehicle repairs every other month, maybe that will help in the decision to buy another vehicle.

Never invite me to breakfast (or any meal for that matter).

But if you eat a lot of cereal in June (you're really really hungry, or had company spend three weeks), and fast, diet or eat out in July, your numbers are meaningless. You have an expense for an item that you didn't incur.

Generally expensed in the period paid.

Consider Googling "accrual accounting" and "cash accounting". That might help.

Why? To what end will you divide and subdivide your daily and/or one-time expenses? What if - after a year, the breaks are still good? Do you go back and change all your reports and carry the expense out another year?

Dude. You need a life. There's no valid reason to be doing this for your personal expenditures.

I can't imagine anyone in any buisness capitalizing a break job.

There are rules for "materiality" which, generally, your accountant (read: CPA/CA) will be able to tell you if a repair is "material". Check with your accountant.

I usually gauge it like this: if it is worth more than $1,000.00 and will extend the useable life of the item (ie. vehicle or equipment) then it is material, and I add the cost of the repair to the depreciable cost of the vehicle, and adjust the useable life accordingly.

If the repair is under $1,000.00 and will not necessarily extend the life of the item (ie. head gasket, or exhaust system repairs), then I expense it as at the date of the invoice for the repair.

Any regular maintenance, ie. oil changes, tune ups, tires, alignments, winterizing, is expensed by default.

Stephanie

Joe Canuck wrote: