When an item is acquired for the first time as “brand new”, the value of the asset is referred to as its Cost. The declining value of an asset is referred to as its Depreciation. At one time, the item will completely lose its worth or productive value. Nevertheless, the value that an asset has after it has lost all of its value is referred to its Salvage Value. At any time, between the purchase value and the salvage value, accountants estimate the value of an item based on various factors including its original value, its lifetime, its usefulness (how the item is being used), etc.
The Double Declining Balance is a method used to calculate the depreciating value of an asset. To get it, you can use the DDB function whose syntax is:
DDB(cost, salvage, life, period)
The first argument, cost, represents the initial value of the item.
The salvage argument is the estimated value of the asset when it will have lost all its productive value. The cost and the salvage values must be given in their monetary values.
The value of life is the length of the lifetime of the item; this could be the number of months for a car or the number of years for a house, for example.
The period is a factor for which the depreciation is calculated. It must be in the same unit as the life argument. For the Double Declining Balance, this period argument is usually 2.
Another method used to calculate the depreciation of an item is through a concept referred to as the Straight Line Depreciation. This time, the depreciation is considered on one period of the life of the item. The function used is SLN and its syntax is:
SLN(cost, salvage, life);
The cost argument is the original amount paid for an item (refrigerator, mechanics toolbox, high-volume printer, etc).
The salvage, also called the scrap value, is the value that the item will have (or is having) at the end of Life.
The life argument represents the period during which the asset is (or was) useful; it is usually measured in years.
The Sum-Of-The-Years’-Digits provides another method for calculating the depreciation of an item. Imagine that a restaurant bought a commercial refrigerator (“cold chamber”) for $18,000 and wants to estimate its depreciation after 5 years using the Sum-Of-Years’-Digits method. Each year is assigned a number, also called a tag, using a consecutive count; this means that the first year is appended 1, the second is 2, etc. This way, the depreciation is not uniformly applied to all years.
Year => 1, 2, 3, 4, and 5.
The total count is made for these tags. For our refrigerator example, this would be
Sum = 1 + 2 + 3 + 4 + 5 = 15
Each year is divided by this Sum, also called the sum of years, used as the common denominator:
This is equivalent to 1. As you can see, the first year would have the lowest divident (1/15 ≈ 0.0067) and the last year would have the highest (5/15 ≈ 0.33).
To calculate the depreciation of an asset, you can use the sum of the years' digits function called SYD. Its syntax is:
SYD(cost, salvage, life, period)
The cost argument is the original value of the item; in our example, this would be $18,000.
The salvage parameter is the value the asset would have (or has) at the end of its useful life.
The life is the number of years the asset would have a useful life (because assets are usually evaluated in terms of years instead of months).
The period parameter is the particular period or rank of a Life portion. For example, if the life of the depreciation is set to 5 (years), the period could be any number between 1 and 5. If set to 1, the depreciation would be calculated for the first year. If the Period is set to 4, the depreciation would calculated for the 4th year. You can also set the period to a value higher than life. For example, if life is set to 5 but you pass 8 for the period, the depreciation would be calculated for the 8th year. If the asset is worthless in the 8th year, the depreciation would be 0.
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