STRAIGHT LINE (SLN) METHOD:
In this method, a specific amount of money is charged year
after year as the asset depreciates over its useful life.
For the manual calculation, the syntax or formula is:
(Cost – Scrap
Value)/Useful Life
The SLN MS Excel Syntax is:
=SLN(Cost, Salvage,
Life) then press the enter key
Where:
Cost is the
amount you bought the asset.
Salvage or Scrap
Value is the worth of the asset after its useful life.
Life or Useful Life is
the time that the asset takes to attain its scrap value.
PRACTICAL
ILLUSTRATION OF THE STRAIGHT LINE METHOD
Now, let me show you a practical example of how to calculate
the depreciation of an asset using the Straight Line Method.
QUESTION:
An Android phone was bought for $20000 with 5 years useful
life after which it becomes a scrap with $5000 value. Calculate the annual
depreciation charge using the straight line method.
SOLUTION:
SOLVING SLN METHOD MANUALLY;
Cost = $20000
Salvage value = $5000
Useful life = 5 years
Therefore Annual
Depreciation Charge = (Cost – Scrap
Value)/Useful Life
= ($20000 - $5000) / 5 = ($15000) / 5 = $3000
This means that an annual depreciation charge of $3000 will
be charged on the asset for 5 years.
USING MICROSOFT
EXCEL;
Prepare your worksheet as shown below.
Then type this formula into cell B4:
=SLN(B1, B2, B3)
then press the enter key.
Excel returns $3000 in cell B4.
NOTE:
You should get the same answer you got when you solve it
manually, which
DOUBLE DECLINE
BALANCE (DDB) METHOD:
Under this method, a specific percentage is charged to the
balance of the asset as the asset depreciates. This means that the depreciation
charge on the asset will be higher in the early age of the asset than on its
later age.
For the manual calculation, the syntax or formula is:
(Rate * Cost)/(Useful
Life * 100)
The DDB MS Excel Syntax is:
=DDB(Cost, Salvage,
Life, Period, Factor) then press the enter key
Where:
Cost is the
amount you bought the asset.
Salvage or Scrap
Value is the worth of the asset after its useful life.
Life or Useful Life is
the time that the asset takes to attain its scrap value.
Period is the age
of the asset.
Rate or Factor is the Depreciation rate of the
asset usually expressed in percentage.
PRACTICAL
ILLUSTRATION OF THE DOUBLE DECLINE BALANCE (DDB) METHOD
This time, I will show you a practical example of how to
calculate the depreciation of an asset using the Double Decline Balance Method.
QUESTION:
Philips Bakery bought an asset of $200000 with 6 years
useful life after which it becomes a scrap. Calculate the depreciation charge
for the period of 4 years assuming 25% was given as the depreciation charge
using the DDB method
SOLUTION:
SOLVING DDB METHOD MANUALLY;
Cost = $200000
Useful life = 6 years
Rate = 25%
The depreciation charges for the four years are calculated
as follows using the above given formula and substituting values directly:
Depreciation Charge
for the 1st Year
= (25 * 200000) / (6 * 100) = $8333.33
Worth of Asset at the
beginning of the 2nd Year
= (200000 – 8333.33) =
$191666.67
Depreciation Charge
for the 2nd Year
= (25 * 191666.67) / (6 * 100) = $7986.11
Worth of Asset at the
beginning of the 3rd Year
= (191666.67 – 7986.11) = $183680.56
Depreciation Charge
for the 3rd Year
= (25 * 183680.56) / (6 * 100) = $7653.36
Worth of Asset at the
beginning of the 4th Year
= (183680.56 – 7653.36) = $176027.20
Depreciation Charge
for the 4th Year
= (25 * 176027.20) / (6 * 100) = $7334.47
Worth of Asset at the
end of the 4th Year
= (176027.20 – 7334.47) = $168692.73
Calculation Tips:
Current Worth or
Value = Previous Worth - Previous Depreciation Charge
Therefore the annual depreciation charge for the 1st,
2nd, 3rd and 4th year are:
$8333.33, $7986.11, $7653.36 and $7334.47 respectively
USING MICROSOFT
EXCEL;
Prepare your worksheet and enter the data as shown below.
Place your cell pointer in the following specified cells and
type the following syntaxes:
For the Subsequent Worth:
In cell C2: =B2 – B7
In cell D2: =C2 – C7
In cell E2: =D2 – D7
For the Depreciation
Charges:
In cell B7: =DDB(B2,
0, B4, B5, B6)
In cell C7: =DDB(C2,
0, C4, C5, C6)
In cell D7: =DDB(D2,
0, D4, D5, D6)
In cell E7: =DDB(E2,
0, E4, E5, E6)
If you got everything correctly, your worksheet should now
look like the one shown below.
CONCLUSION NOTES:
Excel may display an error message, check the error code and
make the necessary corrections, revise Chapter 1 of Part 3 where I explained MS Excel error messages and their solutions in detail now.
The depreciation charge values for the 4 years using MS
Excel DDB syntax are slightly different from the values gotten when manually.
The difference results from the approximation you make when solving it
manually. When solving in real life challenges, avoid approximating values. Use
the values exactly as given by your calculator.
This
is the end of part 1 of chapter 5 of this online tutorial series.
In the next part (Part 2 of chapter 5), I will
explain how to calculate depreciation charges using the Sum of Years Digits and
then give you some practical exercises.
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