What is a Capital Improvement?

A capital improvement is a major expenditure that enhances a fixed asset to such an extent that the improvement itself can be recorded as a fixed asset. A capital improvement expenditure tends to increase the market value of an asset.

How to Account for a Capital Improvement

To be a fixed asset, the improvement must be expected to last for at least one year. The enhancement must fall into one of the following categories:

It extends the life of the asset
It enhances the overall value of the asset
It adapts the fixed asset so that it can be used in a new way

If an expenditure meets these criteria, then it is recorded as a fixed asset, with a debit to the applicable fixed asset account and a credit to either the cash or accounts payable account. Once the improvement is completed, it is depreciated over its estimated useful life.

If an expenditure does not meet any of these criteria, then it is instead classified as a repair or maintenance expense, and so is charged to expense as incurred.

Examples of Capital Improvements

An example of a capital improvement is a new roof on an office building, since it extends the life of the building asset. Similarly, repaving a parking lot extends the life of the asset, and so can be classified as a capital improvement.