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

Sharma Traders bought machinery on 1 April 2023 for Rs 5,00,000 and charges depreciation at 10% per annum on the straight line method, with an estimated scrap value of nil. Which journal entry correctly records the depreciation for the year ended 31 March 2024?

Depreciation of Rs 50,000 is debited to Depreciation Account and credited to Machinery Account. It is a non-cash charge that reduces the asset's book value, so no cash is paid. The depreciation account is later closed by transfer to the Profit and Loss Account.

  1. ADepreciation A/c Dr 50,000 to Machinery A/c 50,000Correct
  2. BMachinery A/c Dr 50,000 to Depreciation A/c 50,000
  3. CDepreciation A/c Dr 50,000 to Cash A/c 50,000
  4. DProfit and Loss A/c Dr 50,000 to Provision for Depreciation A/c 5,000

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 no provision account is maintained. Option B reverses the entry, and option C wrongly treats it as a cash payment.

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