Definition: A betterment is an improvement to a plant asset that makes the asset more efficient or more productive. Betterments are usually expensive in nature and are not expensed like general repairs and maintenance expenses.
What Does Betterment Mean?
Instead, betterments are capitalized because they actually improve the performance or life of the asset significantly. The cost of the improvement is added to the original purchase price of the asset and listed on the balance sheet as either a stand-alone asset or combined with the original asset.
Manufacturers and restaurants typically improve their assets from time to time because the original cost of the assets. Manufacturers, for instance, often buy CNC machines for more than $100,000. These machines are worth fixing and upgrading because of the initial investment. A manufacturer might have a new job that requires tool changers and spindles that aren’t already installed on their CNC machines. In order to take the new job, the manufacturer has to improve its machines. It adds $25,000 of new parts to its $100,000 CNC machine.
This is considered a betterment because it improves the functionality and efficiency of the machine. The $25,000 of improvements would be added to the $100,000 of historical cost and the new asset could be reported on the balance sheet as a $125,000 asset.
Betterments are also depreciated just like the original capital asset. In our CNC machinery example, the original machine would continue to be depreciated as well as the new improvements. That is why some companies choose to account for improvements separately. This way two different depreciation schedules can be maintained.