Q.A firm bought a machinery for ₹7,40,000 on 1st April, 2018 and ₹60,000, is spent on its installation. Its useful life is estimated to be of 5 years. It's estimated reliable or scrap value at the end of the period was estimated at ₹40,000. Find out the amount of annual depreciation and rate of depreciation.

Concept: Straight Line Depreciation – Under this method, the asset loses an equal amount of value each year over its useful life.

Step 1 – Total cost of the asset

Purchase price + installation cost = ₹7,40,000 + ₹60,000 = ₹8,00,000.

Step 2 – Depreciable amount

Total cost − scrap value = ₹8,00,000 − ₹40,000 = ₹7,60,000.

Step 3 – Annual depreciation

Depreciable amount ÷ useful life = ₹7,60,000 ÷ 5 = ₹1,52,000 per year. …

Why Straight Line Depreciation?

When a company buys a long-term asset like machinery, it doesn't expense the entire cost in the year of purchase. Instead, the cost is spread over the asset's useful life — this is called depreciation. The Straight Line Method (SLM) is the simplest: it assumes the asset loses equal value every year.

The logic is straightforward:

• You pay a total cost to get the asset ready for use.
• At the end of its life, you expect to recover some scrap value.
• The net cost you actually "consume" is (Total Cost – Scrap Value).
• Divide that by the number of years, and you get the annual depreciation.

The rate of depreciation is then just the annual depreciation expressed as a percentage of the total cost.

Step-by-step solution

1. Find the total cost of the machinery

The purchase price is ₹7,40,000. But you also spent ₹60,000 on installation — that's a necessary cost to make the asset usable. Under accounting rules, all costs to bring the asset to its working condition are added to its cost.

So the machinery's book value at the start is ₹8,00,000.

2. Identify the scrap value and useful life

Scrap value (also called residual or salvage value) is what the asset is expected to be worth at the end of its life. Here it's ₹40,000. The useful life is 5 years.

3. Calculate the depreciable amount

This is the total cost that will be gradually expensed:

4. Compute the annual depreciation …