How is depreciation calculated using the straight-line method?

The straight-line method of calculating depreciation is quite straightforward and is based on the idea of evenly distributing the cost of an asset over its useful life. The formula for calculating depreciation under this method is derived from the initial cost of the asset, reduced by its residual value, and then divided by its useful life.

The correct approach involves taking the historical cost of the asset, subtracting the estimated residual value (which is the amount expected to be received at the end of the asset's useful life), and then dividing this by the asset's useful life in years. This provides a constant annual depreciation expense.

The formula highlighted in the correct choice effectively reflects this process by expressing it as:

(Historical Cost - Residual Value) x %

where the percentage represents the depreciation that occurs each year, based on the asset's useful life.

This consistent annual depreciation allows businesses to systematically allocate the cost of the asset over its life, making it a preferred method for many accountants, as it simplifies budgeting and financial forecasting.