Estimating Practice Exam

Which method is most commonly used for calculating depreciation?

1. Accelerated

2. Straight-line

3. Declining-balance

4. Sum-of-the-years-digits

The correct answer is: Straight-line

The straight-line method is the most commonly used approach for calculating depreciation primarily due to its simplicity and ease of application. This method spreads the cost of an asset evenly over its useful life, ensuring that each accounting period reflects the same amount of expense related to the asset. The formula involves taking the initial cost of the asset, subtracting its salvage value, and then dividing that amount by the estimated useful life of the asset. This uniformity makes it a preferred choice for many businesses and accounting practices because it leads to straightforward financial statements and predictable expense patterns. Many stakeholders, including investors and auditors, appreciate the clarity it provides, as it avoids the complexities and potential variability associated with alternative methods, such as accelerated depreciation or declining balance methods. Such alternatives can result in fluctuating expense amounts from year to year, making analysis more complicated. In the context of financial management, the predictability and ease of understanding associated with the straight-line method are key reasons why it is widely used.