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CMA Foundation · Fundamentals of Financial and Cost Accounting · Depreciation (Straight Line and Diminishing Balance Methods)

Sharma Traders bought machinery for Rs 5,00,000 on 1 April 2023 and charges depreciation at 10% p.a. on the straight line method. The journal entry for depreciation at the end of the first year is:

Depreciation of Rs 50,000 is recorded by debiting Depreciation A/c and crediting Machinery A/c, because it is a non-cash expense that reduces the asset's book value. No cash is paid, so cash is not credited.

  1. ADebit Depreciation A/c Rs 50,000; Credit Machinery A/c Rs 50,000Correct
  2. BDebit Machinery A/c Rs 50,000; Credit Depreciation A/c Rs 50,000
  3. CDebit Depreciation A/c Rs 50,000; Credit Cash A/c Rs 50,000
  4. DDebit Depreciation A/c Rs 5,00,000; Credit Machinery A/c Rs 5,00,000

Explanation

Depreciation = 10% of 5,00,000 = Rs 50,000. It is a non-cash expense, so Depreciation A/c is debited and the asset account is credited when depreciation is written off directly. Crediting cash is wrong because no cash is paid.

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