Let’s say a company purchases a truck for 10,000,000 Rwf on January 1. The truck has a useful life of 10 years at which point it will not have any value.

Should you recognize an expense for 10 million Rwf in the year you purchase the truck? Why or why not?

Does it make more sense to recognize an expense of 1 million Rwf per year? Why or why not?

The most common method of depreciating assets is the straight-line method. Under this depreciation method, the depreciation for each accounting period is the same.

Depreciation expense=(Cost -residual value) / (useful life)

Cost = total paid 

Residual value = remaining value at end of useful life

Useful life = estimated lifespan over which the asset will be used

Using our example:

Depreciation expense=(10,000,000 –0)/(10 years)

Depreciation expense=1,000,000

Accumulated depreciation: The amount of an asset’s cost that has been allocated to depreciation expense since the asset was acquired. 

Accumulated depreciation is contra asset account (an asset account with a credit balance.

Qs: What are the associated journal entries?

And now let’s look at how this impacts the value of the truck on our balance sheet

An asset’s net book value (the value of the asset on the balance sheet) is calculated as:

Cost – accumulated depreciation

In our example, after Year 1, the net book value of the truck is 9,000,000 (10,000,000 less 1,000,000)

In Year 2, the net book value would be 8,000,000 (10,000,000 less 2,000,000) and so on.

Qs: Any questions on the concept of depreciation?