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ACCA Applied Knowledge · Financial Accounting · Depreciation

A company buys a machine for $50,000 and depreciates it at 20% per year on the straight-line basis with no residual value. What is the journal entry to record the depreciation charge for the first year?

Debit depreciation expense and credit accumulated depreciation with $10,000, which is 20% of the $50,000 cost. The expense reduces profit, and the allowance account keeps the original cost intact in the ledger so that carrying amount can be shown.

  1. ADebit Depreciation expense $10,000; credit Accumulated depreciation $10,000Correct
  2. BDebit Accumulated depreciation $10,000; credit Depreciation expense $10,000
  3. CDebit Depreciation expense $10,000; credit Machine (cost) $10,000
  4. DDebit Depreciation expense $40,000; credit Accumulated depreciation $40,000

Explanation

Annual charge is 20% x $50,000 = $10,000. The expense is debited to profit or loss and the credit goes to the accumulated depreciation account, leaving cost unchanged. Crediting the cost account directly would misstate the cost record.

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