This section is from the book "Business Finance", by William Henry Lough. Also available from Amazon: Business Finance, A Practical Study of Financial Management in Private Business Concerns.
There is usually little question as to the actual outgo for raw materials or other purchases, labor, selling expenses, salaries of officers and other administrative overhead, etc., all of which are directly chargeable to the various accounts that are grouped under the general heading of "Operating Expenses. " Even here, claims are sometimes advanced in favor of charging such expenditures as for advertising and for training employees, to capital accounts rather than to operating expenses, on the theory that such expenditures are a permanent benefit to the business. If such claims are to be allowed at all, which is usually doubtful, it is regarded as correct practice to charge items of this nature to some such account as "Deferred Expenses," which is carried on the balance sheet for the time being as a capital account but is intended to be written off within a brief period.
There is little, if any, question also as to most expenditures for repair and maintenance of the permanent property of the business. This property must be kept up as nearly as possible to its original standard of efficiency, and the expense of so doing can scarcely be regarded otherwise than as a portion of the total expense of operation. Going a step farther, it is well to point out that many new companies make a serious error in that they do not at once begin to charge against profits a fair allowance which will take care of at least a portion of the repairs and other maintenance expenses that are to be expected in the course of a few years. Owners of apartment houses and other city real estate are frequently negligent in this respect to their own detriment. A building of this character may run for some years with comparatively slight outlay for repairs; then all at once everything is out of order. Either large sums must be expended and charged against operating expenses or the character of the building will change for the worse and a lower income will be obtained. The same line of reasoning applies to many manufacturing establishments. Electric railways up to the present time have not, on an average, consumed nearly so large a ratio of their gross earnings in maintenance as do steam lines. Whether the ratio will later become larger is an undecided question, but perhaps it may reasonably be assumed that it will increase. Unless provision is made in advance, the results cannot be pleasing to shareholders in such companies. The subject of maintenance and repairs will be again referred to a little farther on in this chapter.