Understanding Depreciation on Machinery
Depreciation is the systematic allocation of the cost of a tangible asset over its useful life. In this case, we will calculate the depreciation for a machine costing 30,000 at a rate of 10% per annum for 2 months.
Depreciation Calculation
- Cost of Machine: 30,000
- Depreciation Rate: 10% per annum
- Time Period: 2 months (which is 2/12 of a year)
Depreciation Amount
- Annual Depreciation: 30,000 * 10% = 3,000
- Depreciation for 2 Months: 3,000 * (2/12) = 500
Journal Entry for Depreciation
To record the depreciation of the machine, the following journal entry is made:
- Date: [Insert Date]
- Account Titles:
- Debit: Depreciation Expense (Profit & Loss Account) - 500
- Credit: Accumulated Depreciation (Balance Sheet) - 500
Journal Entry Explanation
- Debit Entry: Increases the Depreciation Expense, reflecting the cost incurred during the period, which reduces the net income.
- Credit Entry: Increases the Accumulated Depreciation, showing a reduction in the book value of the machinery on the balance sheet.
Conclusion
Recording depreciation is essential for accurately reflecting the value of assets and ensuring that financial statements provide a true picture of the company’s financial health.