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The Declining Balance method of calculating depreciation enables companies to accelerate the rate at which they claim the tax benefits inherit in asset depreciation. As the name implies the double declining balance depreciation method doubles the rate at which the declining balance method calculates an asset's depreciation. To calculate depreciation using the Double Declining Balance method, you use the DDB function. The DDB function has five arguments. The first is cost, which is the initial cost of the investment. And on this worksheet that's found in cell B7 and I'll press F4 to make that reference an absolute reference so it won't change as the formula is copied down the table column.
Then you have the asset's salvage value, found here in cell B9. Make it an absolute reference. The economic life of the asset found in cell B11. Once again, absolute reference. And then we have the period. That is the year and it's found in cell A16. Because we want that cell reference to vary as we copy the formula down the table column, we'll leave that as a relative reference. The final argument in the DDB function, which is called factor, is the amount by which you want to speed up the depreciation schedule.
For example, if for some reason you want to use triple declining balance depreciation, you would set the factor argument to 3. You would want to make sure that your firm's accountant signed off on that decision. The default value for the factor argument is 2. So, we don't have to change it for this function. Just close out the parenthesis. Hit Return. And there you could see the first ten years of depreciation for this asset. To calculate the new value of the asset at the end of each year, you would subtract the accumulated depreciation from the asset's initial value.
To do that we create this formula. You type in the initial value, the initial cost, which is in cell B7, and make it an absolute reference, so it doesn't change as we copy the formula down the table column. And you subtract the sum of all of the accumulated depreciation. So, the first cell in the Depreciation column is cell B16. We do not want that cell reference to change. So, we make it an absolute reference by typing F4, enter a colon to indicate we are entering a cell range, and we type B16 again.
In other words, for the first year the formula will only consider the Depreciation Value in cell B16. But as you'll see when we complete the formula, and it's copied down the table column, that Excel, because the second B16 reference was a relative reference, it changed it as it copied the formula down the table column. So, here in C17 the last reference is B17, so it uses the values from these two cells. Same thing here. The last reference is to B16 to B18 so it uses the depreciation from B16 to B18.
The Double Declining Balance method assigns a high percentage of an asset's depreciation to the first part of its economic life. As with the Declining Balance method, companies can use their depreciation related tax savings to invest in other areas.
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