15. Handling repair costs in the accounts.—The customary practice has been to count repair costs as expenses of the period in which the repairs are made. In the case of a large plant with machinery so great in amount that there is a continuous and fairly uni form amount of repairs, this practice may serve the purpose. But in a smaller plant, particularly where repairs vary in cost from year to year, this is not good accounting. To reckon the entire cost of a heavy repair in the expenses of the year or month in which it is made is obviously incorrect. Therefore, the prac tice of spreading the cost of repairs thru a series of years is generally favored in smaller plants.
16. Substituting a repairs-reserve account for the depreciation reserve.—The fact that machines consist of replaceable parts substitutes the parts for the whole machine, so far as depreciation due to wear or physical decay is concerned. Instead of having the whole machine fail and go to the scrap heap, the component parts fail one by one and also go to the scrap heap, but the parts are replaced by new ones. The depre ciation of the whole machine consists of the aggregate depreciation of its parts. Therefore, the correct treatment theoretically of depreciation and repairs, where wear or tear or physical decay is the effective cause, is to make periodic debits to specific or class depreciation accounts, as designated above. The rate will be governed-by the estimated rapidity with which various parts will have to be replaced. The credit would then be made, not to a "reserve for deprecia tion" account, but to a "reserve for repairs" account.
In the general ledger, there would be class reserves as already described, but specific reserves will be kept in the detail ledgers. Then, when a part failed, the cost of a new part, together with the cost of taking out the old part and putting in the new one, should be charged to a class "repairs" account in the general ledger and the specific "repairs-reserve" account in the detail ledger.
Finally, at the close of the fiscal period, the class "repairs" accounts should be closed into the class "re pairs-reserve" accounts. The adjusted balances of the latter represent the revised offsets to the relevant asset accounts, the service life of which asset has been prolonged by the repairs.
17. Treatment of obsolescence in the accounts.— The procedure for repairs just described may also be applied to obsolescence. With regard to this item it is suggested that, at the time of purchasing an in strument of certain design, the life of the design be fore it becomes obsolete should be estimated. On this basis a supplementary allowance should be made and treated in a manner like that described for the de preciation reserve. At the time of scrapping an in strument the accounting procedure followed would be the same as in the case of depreciation reserves, ex cept that the word "obsolescence" is substituted for "depreciation." If this procedure is observed, the terms "repairs re serve" and "obsolescence reserve" would be substituted for "depreciation reserve." If the reader does not wish to treat ordinary light repairs in this way, there can be no practical objection to separating all repairs into two classes, namely: (1) light repairs and (2) heavy repairs.
The light repairs may adequately be treated in the ordinary way, counting them as expenses or costs of the period in which such repairs are made. In this event, however, it is strongly recommended that "heavy repairs-reserve" accounts be created and op erated in the manner just described.