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The Declining Balance method of calculating depreciation accelerates the rate at which an asset loses its value over time. You use the DB function to calculate depreciation in Excel. The Declining Balance method reduces an assets value by the amount it depreciated in the previous years. Excel then calculates the new depreciation based on that lower value. Hence the name Declining Balance Method. The DB function has four arguments, Cost, Salvage Value, Economic Life and Period.
The cost is the asset's initial cost. Salvage Value is what the asset will sell for when it becomes economically obsolete. Economic Life is the number of years that the asset will be economically viable and Period is the time frame for which you are calculating depreciation. Unless you are dealing with very short-lived assets, that period is almost always a year. So, to complete the formula we have =DB, the Initial Cost is in cell B7, and because we are copying the formula further down, the column in the table, we'll make that an absolute reference by pressing F4.
We have the Salvage Value in cell B9 and make it an absolute reference, the Economic Life, B11, same thing, make it an absolute reference. The period is in cell A16. And because we are copying the formula down and we want the formula to draw its value from the cell directly to the left, such as cell A16 in this case, we'll leave that as a relative reference. And you don't need to specify a month, because the period is one year.
We can close the parenthesis. Press Enter. And you can see the amount of depreciation each year using the Declining Balance Method. But remember that the second part of the Declining Balance Method is that you need to know an asset's New Value at the end of each year. So, now that we have the yearly depreciation we can calculate the new value, and that formula is =B7, which is the Initial Cost. We'll make that an absolute reference by pressing F4 and we subtract the sum of all of the previous depreciation amounts from the Initial Cost.
To do that, we have SUM B16, which is the first depreciation amount. We make this cell reference an absolute reference so it will not change, then a colon to indicate we are entering a range and then B16. Now, we have entered B16 twice and the reason is because we want to create a range that will change as the formula is copied down the column. So, the first B16 is an absolute reference, so it will not change.
The second reference to B16 is left as a relative reference so it will change. In other words, in cell C17, it would be the SUM of B16 to B17, and you'll see how that works in a second. When I close the parenthesis and hit return. You have the depreciation, which is subtracted from the Initial Cost, and you have the New Value in cell C16, C17 and so on down to C22. The Declining Balance Depreciation Method enables companies to capture more depreciation benefits early in an assets economic life.
Decreasing tax payments and thereby freeing up capital to invest in other areas.
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