In business, property refers to an asset that is used to generate business income. Property like, most assets, is associated with several costs so that it may remain relevant to the business in the long term. For example, an entrepreneur with buildings or rental houses will incur maintenance costs on these houses as is required by law in any landlord-tenant relationship. This may involve repair of windows, painting of walls and provision of basic amenities. These are costs or expenses to that person’s business.
It may appear that these costs increase the value of the asset and hence the consideration of allocating these costs to the capital account. Similarly, the costs may be an indicator of depletion of the asset hence the consideration of allocating them to the reserve for replacement. However, these costs should be allocated to the POM account since they have a direct effect on the income in a certain financial year. This is usually the determinant of whether the costs are an annual expense (Kyle, Baird and Spodek, 2000).
The question of how to allocate operation and maintenance costs arises when these costs are very large such that it is not easy to determine whether to consider them as an additional capital expenditure. This may occur when the asset is damaged and the repairs involved are extremely expensive. In the case of payment of rent of premises, a firm may consider such an expense as capital expenditure as is the case with lease payments.
Similarly, costs incurred in repairing defects prior to use by tenants or clients of a firm or businessperson cannot be claimed as a revenue expense. This is because these expenses relate to the period prior to use of the asset. Property expenses that are almost equal to the net value of the asset may be allocated to the replacement account since they are too high to be considered as revenue expenditure (Bragg, 2010).
References
Bragg, S. M. (2010). Wiley GAAP 2011: Interpretation and Application Of Generally Accepted
Accounting Principles. Hoboken, N.J.: Wiley.
Kyle, R. C., Baird, F. M., & Spodek, M. S. (2000). Property Management (6th ed.). Chicago:
Real Estate Education Co..
