 If you watch the video about how to determine asset costs, you know that all costs incurred to get an asset ready for its intended purpose gets debited to a specific plant asset account like land or building. We call this process of debiting a plant asset account capitalizing a cost. But what do we do with costs we incur after the asset is in use? We have two options to treat costs incurred after a plant asset has been placed in service. We can capitalize the cost, which means we debit a plant asset account and we call this type of cost a capital expenditure. Or we can expense the cost, which means we debit an expense account like repair and maintenance expense. We call this type of cost an ordinary expense. Even though there are two ways to treat the cost, we don't get to choose which one we want. There are criteria that determine how the costs should be accounted for. In order to be a capital expenditure, a cost must meet one of the following four criteria. Costs must extend the useful life of the plant asset or costs must increase the capacity of the plant asset or costs must increase the efficiency of the plant asset or finally costs must improve the quality of the outputs. When a cost qualifies as a capital expenditure, we debit a plant asset account. Here's a simple example. Depeche Mode pays $50,000 to overhaul recording equipment. The overhaul increases the life of the recording equipment. Since it increases the useful life, the cost is a capital expenditure. Therefore, we debit equipment and credit cash for $50,000. When a cost doesn't meet any of the capital expenditures criteria, then it is treated as an ordinary expense. So let's look at this example again. Depeche Mode pays $50,000 to repair recording equipment. Let's assume the repair doesn't impact the recording equipment in any way so that it wouldn't be treated like a capital expenditure. So this is an ordinary expense. We debit repair expense and credit cash for $50,000. You might wonder why this matters, but it does. The matching principle tells us to match expenses against revenues in the period in which they were incurred. If costs increase the useful life of an asset, we would want to spread that cost against many revenue periods. We can do this as a capital expenditure. We can't as an ordinary expense. Because of this incorrect treatment of costs incurred after an asset has been placed in service, could result in over or understatement of expense on the income statement and assets on the balance sheet.