Business Functions

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Business Functions

Introduction

An asset is an object of value. It could be a person, a car, a piece of jewelry, a refrigerator. Anything that has a value is an asset. In the accounting world, an asset is a piece of/or property whose life span can be projected, estimated, or evaluated. As days, months or years go by, the value of such an asset degrade.

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

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:

Function DDB(cost, salvage, life, period, factor) As Double

The first argument, cost, represents the initial value of the item and it is required. The salvageargument is the estimated value of the asset when it will have lost all its productive value. This argument also is required. 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.

 Practical Learning: Calculating the Double-Declining-Balance

  1. Start Microsoft Excel and fill up Sheet1 as follows:
     
    Double-Declining-Balance
  2. Save it as Depreciation
  3. Double-click Sheet1 to put its label into edit mode. Type Double-Declining-Balance and press Enter
  4. Click cell C8 and, on the Ribbon, click Formulas.
    In the Function Library section, click Financial and click DDB and move the Function Arguments dialog box so you can see the values on the worksheet
  5. Click the box to the right of Cost and, on the worksheet, click cell C4
  6. In the Function Arguments dialog box, click the box to the right of Salvage and, on the worksheet, click cell C5
  7. In the Function Arguments dialog box, click the box to the right of Life and, on the worksheet, click cell C6
  8. In the Function Arguments dialog box, click the box to the right of Period and, on the worksheet, click cell C7
  9. In the Function Arguments dialog box, click the box to the right of Factor and type 2
     
    Double-Declining-Balance
  10. Click OK

The Straight Line Depreciation

Microsoft Excel provides another method used to calculate the depreciation of an item. This time, the depreciation is considered on one period of the life of the item. The function used isSLN and its syntax is:

Function SLN(cost, salvage, life) As Double

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.

 Practical Learning: Calculating the Double-Declining-Balance

  1. Click Sheet2 and fill it up as follows:
     
    Straigght-Line Method
  2. Double-click Sheet2 to put its label into edit mode. Type Straight-Line Depreciation and press Enter
  3. Click cell C7
  4. In the Function Library section of the Ribbon, click Financial and click SLN.
    Move the Function Arguments dialog box so you can see the values on the worksheet
  5. Click the box to the right of Cost and, on the worksheet, click cell C4
  6. In the Function Arguments dialog box, click the box to the right of Salvage and, on the worksheet, click cell C5
  7. In the Function Arguments dialog box, click the box to the right of Life and, on the worksheet, click cell C6
     
    Straight-Line Depreciation
  8. In the Function Arguments dialog box, click OK 
  9. Save the workbook

The Sum of the Years' Digits

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. 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:

Sum

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 for each year, the fractions (1/15 + 2/15 + 3/15 + 4/15 + 5/15) are reversed so that the depreciation of the first year is calculated based on the last fraction (the last year divided by the common denominator). Then the new fraction for each year is multiplied by the original price of the asset. This would produce (this table assumes that the refrigerator will have a value of $0.00 after 5 years):

Year Fraction * Amount = Depreciation
1 5/15 * $18,000.00 = $6,000.00
2 4/15 * $18,000.00 = $4,800.00
3 3/15 * $18,000.00 = $3,600.00
4 2/15 * $18,000.00 = $2,400.00
5 1/15 * $18,000.00 = $1,200.00
Total Depreciation = $18,000.00

Overall, Microsoft Office uses the following formula to calculate an item depreciation using the Sum-Of-The-Years'-Digits:

SYD

The function used to calculate the depreciation of an asset using the sum of the years' digits is called SYD and its syntax is:

Function SYD(cost, salvage, life, period) As Double

The cost argument is the original value of the item; in our example, this would be $18,000. Thesalvage parameter is the value the asset would have (or has) at the end of its useful life. Thelife 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 periodcould 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.

 Practical Learning: Calculating the Depreciation Using SYD

  1. Click Sheet3 and fill it up as follows:
     
    Sum-Of-Years Depreciation
  2. Double-click Sheet3 to put its label into edit mode. Type Sum-Of-Years Depreciation and press Enter
  3. In the Function Library section of the Ribbon, click Financial and click SYD.
    Move the Function Arguments dialog box so you can see the values on the worksheet
  4. Click the box to the right of Cost and, on the worksheet, click cell C4
  5. In the Function Arguments dialog box, click the box to the right of Salvage and, on the worksheet, click cell C5
  6. In the Function Arguments dialog box, click the box to the right of Life and, on the worksheet, click cell C6
  7. In the Function Arguments dialog box, click the box to the right of Life and, on the worksheet, click cell C7
     
    SYD
  8. Click OK
  9. Notice that in our evaluation, we decided that the item would have a $0.00 value at the end of its life. Since this is still a big investment, it is very likely to still be very operational after 5 years. To experiment with different factors, let's assume that the item will have a value of $3500 after 5 years.
    On the worksheet, click cell C5. Type 3500 and press Enter
     
  10. Now, imagine that we think the item will have a value of $0.00 after 5 years but we want to know how much it will have depreciated the 3rd year.
    On the worksheet, click cell C5 and type 0
  11. Click cell C7. Type 3 and press Enter
     
    SYD
  12. Compare with the value we got in our table above
  13. Save the workbook