Q.On 1st April, 2015, Dreams Ltd. purchased an AC for ₹3,00,000 and incurred ₹21,000 towards freight, ₹3,000 towards carriage and ₹6,000 towards installation charges. It has been estimated that the machinery will have a scrap value of ₹30,000 at the end of the useful life which is four years. What will be the annual depreciation and the value of machinery after four years according to linear method?

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

Total cost = Purchase price + Freight + Carriage + Installation

= ₹3,00,000 + ₹21,000 + ₹3,000 + ₹6,000 = ₹3,30,000

Step 2: Determine depreciable amount

Depreciable amount = Total cost − Scrap value

= ₹3,30,000 − ₹30,000 = ₹3,00,000

Step 3: Compute annual depreciation

Annual depreciation = Depreciable amount ÷ Useful life (years)

= ₹3,00,000 ÷ 4 = ₹75,000

Step 4: Value after four years

After full depreciation, the book value equals the scrap value: ₹30,000 …

Straight Line Depreciation is the simplest and most intuitive method. The core idea is that an asset loses value at a constant rate each year. Instead of guessing how much it wears out each period, we simply divide the total depreciable amount (cost minus scrap) by the number of years it will be used. This is why it's called "linear" — plot the book value over time, and you get a straight line sloping downward.

The first step is always to determine the total cost of the asset. You don't just take the purchase price. Any expense that is necessary to get the asset ready for its intended use — freight, carriage, installation — is added to the cost. This is a fundamental accounting principle: capitalise all costs until the asset is operational.

1. Calculate the total cost of the AC.

   Purchase price: ₹3,00,000

   Freight: ₹21,000

   Carriage: ₹3,000

   Installation: ₹6,000

   Total cost = ₹3,00,000 + ₹21,000 + ₹3,000 + ₹6,000 = ₹3,30,000

2. Identify the scrap value and useful life.

   Scrap value (residual value at the end): ₹30,000

   Useful life: 4 years

3. Compute the depreciable amount.

   This is the total cost that will be gradually turned into expense.

   Depreciable amount = Total cost − Scrap value

   = ₹3,30,000 − ₹30,000 = ₹3,00,000

4. Calculate the annual depreciation. Using the formula:

5. Determine the value of machinery after four years. After four years of depreciation, the book value should exactly equal the scrap value. Let's verify: Value after 4 years = Total cost − (Annual depreciation × 4) = ₹3,30,000 − (₹75,000 × 4) = ₹3,30,000 − ₹3,00,000 = ₹30,000 …