Straight-line depreciation, year by year

In this video, you will calculate two years of straight-line depreciation and record the first year's journal entry.

Question one. Machinery bought for one lakh rupees on the first of April is depreciated at ten percent a year on the straight-line method. Show the depreciation and the book value for the first two years, with the journal entry for year one.

Under straight-line depreciation, the same amount is charged each year on the original cost. Annual depreciation equals cost multiplied by the annual depreciation rate.

One lakh rupees multiplied by ten percent gives annual depreciation of ten thousand rupees.

Book value equals cost less accumulated depreciation. At the end of year one, one lakh rupees less ten thousand rupees gives ninety thousand rupees.

Year two depreciation is again ten thousand rupees, because the original cost remains the basis. At the end of year two, ninety thousand rupees less ten thousand rupees gives eighty thousand rupees.

Now, depreciation is a nominal account and an expense; machinery is a real account and an asset. The nominal account rule is to debit all expenses and losses. So, debit Depreciation account by ten thousand rupees.

Machinery decreases in value, so credit Machinery account by ten thousand rupees. At the end of year one, record Depreciation account debit, ten thousand rupees. Then write To Machinery account, ten thousand rupees.

Debits equal credits: ten thousand rupees each.