Q.On 1st April, 2020, Ram purchased a machinery costing ₹40,000 and spent ₹5,000 on its erection. The estimated effective life of the machinery is 10 years with a scrap value of ₹5,000. Calculate the depreciation using the Linear/Straight line method with accounting year ending on 31st March, 2021.

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

Step 1 – Find total cost of the asset

Cost of machinery = ₹40,000

Erection charges = ₹5,000

Total cost = ₹40,000 + ₹5,000 = ₹45,000

Step 2 – Apply the straight line formula

Step 3 – Check the accounting period

The asset was purchased on 1st April, 2020, and the accounting year ends on 31st March, 2021 — exactly one full year. So the full annual depreciation applies.

Why Straight Line Depreciation?

This method assumes the asset loses value at a constant rate each year. It’s simple, predictable, and matches the accounting principle of matching expenses with revenue — the same amount is expensed every year, regardless of how the machine is actually used. The key idea: you subtract the scrap value from the total cost, then divide by the number of years of life. That gives you the uniform annual charge.

Let’s work through the numbers step by step.

1. Find the total cost of the machinery

   The purchase price was ₹40,000, and the erection cost (installation) is added to the asset’s cost because it’s necessary to make the machine ready for use.

   Total cost = ₹40,000 + ₹5,000 = ₹45,000.

2. Identify the scrap value and useful life

   Scrap value (residual value) = ₹5,000 — this is what the machine is expected to be worth after 10 years.

   Useful life = 10 years.

3. Calculate the depreciable amount

   This is the cost that will be spread over the life:

   Depreciable amount = Total cost – Scrap value = ₹45,000 – ₹5,000 = ₹40,000.

   $\text{Annual Depreciation} = \frac{\text{Cost} - \text{Scrap Value}}{\text{Useful Life}}$

4. Compute the annual depreciation

   Using the formula:

5. Determine the depreciation for the first accounting year

   The machinery was purchased on 1st April, 2020, and the accounting year ends on 31st March, 2021. That’s exactly one full year (12 months). So the full annual depreciation applies.

   Depreciation for 2020–21 = ₹4,000.

   Watch out

   A common mistake is to forget to include the erection cost in the asset’s total cost. If you used only ₹40,000, you’d get ₹3,500 per year — which is wrong. Always capitalise all costs to bring the asset to its working condition.

6. Record the journal entry (for context)

   At year-end, the depreciation is charged to the Profit & Loss account and the asset’s value is reduced:

   • Debit Depreciation A/c ₹4,000
   • Credit Machinery A/c ₹4,000 The book value of the machinery on 31st March, 2021, will be ₹45,000 – ₹4,000 = ₹41,000.