Q.A machine costing ₹30,000 is expected to have a useful life of 4 years and a final scrap value of ₹4000. Find the annual depreciation charge using the straight-line method. Prepare the depreciation schedule.
Straight-line depreciation spreads the loss in value evenly over the asset's life. The annual charge is ₹6,500, and the book value falls by that amount each year from ₹30,000 to ₹4,000.
Why straight-line depreciation makes sense
When a company buys a machine, it doesn't treat the entire cost as an expense in the year of purchase. Instead, the cost is spread over the years the machine will actually be used — that's depreciation. The straight-line method is the simplest: it assumes the machine loses the same amount of value every year.
Think of it this way: the machine costs ₹30,000 today, but after 4 years you can sell it for ₹4,000. So the total value you "consume" over those 4 years is ₹30,000 − ₹4,000 = ₹26,000. If you use it equally each year, you should charge ₹26,000 ÷ 4 = ₹6,500 per year.
The book value at the start of year 1 is the original cost. At the end of each year, you subtract the depreciation charge to get the new book value. By the end of year 4, the book value should exactly equal the scrap value — that's how you know the calculation is correct.
Step-by-step solution
1. Identify the given values
Cost of machine = ₹30,000
Scrap value (residual value at end of life) = ₹4,000
Useful life = 4 years
2. Compute the depreciable amount
This is the total value that will be depreciated over the machine's life:
3. Compute the annual depreciation charge
Divide the depreciable amount by the useful life:
A common mistake is to forget to subtract the scrap value before dividing. If you simply divided ₹30,000 by 4, you'd get ₹7,500 per year — but that would overstate the expense and leave the book value at ₹0 instead of ₹4,000 at the end. Always subtract scrap value first.
4. Prepare the depreciation schedule
The schedule shows the book value at the start of each year, the depreciation charged that year, and the book value at year-end.
| Year | Book Value at Start (₹) | Depreciation Charge (₹) | Book Value at End (₹) |
|---|---|---|---|
| 1 | 30,000 | 6,500 | 23,500 |
| 2 | 23,500 | 6,500 | 17,000 |
| 3 | 17,000 | 6,500 | 10,500 |
| 4 | 10,500 | 6,500 | 4,000 |
Notice that the book value at the end of year 4 is exactly ₹4,000 — the scrap value. This confirms the calculation is consistent.
You can verify any year's ending book value directly:
Book value after years = Cost − ( × Annual depreciation)
For year 2: ₹30,000 − (2 × ₹6,500) = ₹30,000 − ₹13,000 = ₹17,000 ✓
5. Interpret the result
Each year, the company records a depreciation expense of ₹6,500 in its profit and loss account. On the balance sheet, the machine's book value reduces by the same amount annually. After 4 years, the machine is carried at its scrap value of ₹4,000 — if sold for that amount, there is no gain or loss on disposal.
The annual depreciation charge is ₹6,500, and the depreciation schedule shows the book value falling from ₹30,000 to ₹4,000 over 4 years.
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