Accounting for future maintenance

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Hi, thanks for the help I've gotten so far on the forum.

I'm running a side business renting out holiday apartments for tourists. I'm trying to do accounts, not for taxes (which will be done later), but to see how well it is going and account for all hidden costs etc... so this is not a question about laws.

I'm trying to figure out how to account for major maintenance projects which have to be done in the future. Suppose we anticipate that after five years of wear and tear by the tenants, the apartments will need a refurbishment for about 15000 euros to bring them back up to the original standard. Since we're only bringing it back to original standard, I would say this is a maintenance expense, not an investment. However, if I record it as zero expenses year 1-4, I'm in for a shock in year 5 when I suddenly have to pay the whole lot. Obviously, from the accounting principles I've understood so far, the actual expenses occurred when my tenants used the apartments, which caused wear and tear, right? Otherwise I would get the wrong picture of how profitable the first years were, and the expenses wouldn't be matched with the revenue.

With furniture it's easy, as we use depreciation. With the apartments themselves, however, meaning walls, floors, windows, etc., it's not exactly depreciation, as the apartment does not need to be replaced like furniture. How would a proper accountant do this?
 

Fidget

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If you're angling at creating a provision for this over the course of 4 or 5 years, then forget it.

The easiest way to do it would be to apply what's known as component accounting to the apartments. That means capitalising the components that make up the apartment separately and depreciating over the useful life. So this could be something like:


* Roof - depreciate over 20 years
* Windows & doors - depreciate over 10 years
* Kitchen - depreciate over 15 years
* Bathroom - depreciate over 12 years
* Central Heating Systems - depreciate over 5 years

When each needs replaced then it will be an investment, so will be capitalised at its new amount.

...you get the gist.
 

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