Accounting Online Program Certification Practice Test

Which method is used by Ben plc for depreciation on their new machine?

1. Reducing balance method

2. Straight-line method

3. Sum-of-the-years-digits method

4. Units of production method

The correct answer is: Straight-line method

The straight-line method is commonly used for depreciation because it provides a consistent and straightforward approach to allocating the cost of an asset over its useful life. Under this method, the same amount of depreciation expense is recognized each accounting period, making it simple for businesses to budget and forecast future expenses. The advantages of using the straight-line method include its ease of calculation and the straightforward financial reporting it provides. It suits assets that have a uniform utility over time, allowing businesses to match the expenditure to the revenue generated by the asset in a clear manner. Other methods, such as the reducing balance or the sum-of-the-years-digits, tend to allocate more depreciation in the earlier years of an asset's life, which can complicate financial analysis and projections. The units of production method, on the other hand, ties depreciation to actual usage, which may not be as predictable and can vary significantly from one period to another. The straight-line method, therefore, offers a reliable and uncomplicated way to manage an asset's depreciation in accounting records.