Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Maintenance Expenses

What it is:

Maintenance expenses are the costs associated with keeping an asset in working order and good condition.

How it works (Example):

For example, let's assume that Company XYZ is a restaurant chain. Its regular maintenance expenses might include having the kitchen hoods and other major equipment serviced once a year, having the vents and grease trap cleaned every so often, having the landscaping cleaned up every spring, and having the air conditioning system serviced.

If Company XYZ owns the buildings, the maintenance expenses are its responsibility. If Company XYZ is renting the buildings, some of the maintenance expenses might be the landlord's responsibility (and the landlord has likely thought of that and included that in the rent it charges Company XYZ).

Why it Matters:

Almost all assets have maintenance expenses, and they can vary considerably. It is important to note that maintenance expenses typically appear on the income statement and thus reduce profits in the period in which they are incurred. There is sometimes a fine line between maintenance expenses and capital improvements, which are capitalized on the balance sheet (and thus don't directly reduce profits in the period in which they are incurred). Though most maintenance expenses very clearly cannot be construed as capital improvements, the argument is tempting for managers who want to show the highest possible profits.