The loss of soil from land surfaces by erosion is widespread and reduces the productivity of agricultural lands. Concurrently, due to increasing human population, agricultural land expansion and exploitation, soil erosion and nutrient loss are the major environmental problems in Ethiopia. This study was conducted to estimate annual losses of soil, soil nutrients and carbon due to rill erosion. The entire watershed was classified into 12 land mapping units (LMUs). Consequently, the cropland was delineated to estimate soil and nutrient losses. Dimensions of the rills were measured at different parts of the landscape, and rill volume of rill erosions was assessed in the field. Disturbed representative composite soil samples were taken from each LMU to estimate the main soil nutrients, and each soil nutrient was estimated using different methods. The result revealed that the amount of soil lost through rill erosion was found to be 3.17 t ha−1 year−1. The average annual nutrient loss by the rill erosion was 41.4 kg ha−1 soil organic matter content, 2.4 kg ha−1 total N, 0.02 kg ha−1 available P and 0.3 kg ha−1 exchangeable K. The annual estimated cost of the soil nutrient lost (total N and available P) due to rill erosion was found to be 1341 USD. This cost would be used to replace the total N and available P nutrients lost through the addition of mineral fertilizers. Water erosion in the form of rill erosion was severely affecting soil fertility management and crop production in the study watershed. Hence, effective integrated watershed management interventions and farmland managements could combat soil erosion.