Calculation of depriciation

Depreciation means the expense of fixed assets. The depreciation calculation is used to find out how this cost should be spread over several periods, since it is assumed that we are not rich enough to immediately reimburse the cost of purchasing a fixed asset. Depending on whether we want to distribute the costs evenly or if we want to pay more in a certain period, in order to pay less, there are several functions for calculating depreciation.

Let’s first mention a few economic terms that are important to know in order to understand the way the depreciation functions are performed:

• Cost is the value by which we acquired a fixed asset. In practice, it represents an invoice value plus the costs (transport, clearance, storage, etc.)
• Salvage is the value of the fixed asset at the end of the depreciation period. It is assumed that after the expiry of the depreciation period, the underlying asset is still worth something, so this is the value at which we should be able to sell it.
• Life is the period (eg the number of years) in which the depreciation of the fixed asset is carried out.

The simplest way of calculating depreciation is a linear method, where it is assumed that the underlying asset will be amortized evenly in each period. To calculate the depreciation, we use the SLN function, whose syntax is:

SLN(<cost>,<salvage>,<life>)

If the cost of a fixed asset is € 1,000 and the write-off value of 200 € and the depreciation period is 5 years, the depreciation is calculated using the following formula:

=SLN(1000,200,5)

This is the depreciation value for each year. Since it is the same for each year, if we multiply this value by 5, we will obtain a value for which the cost of a fixed asset is reduced.

Depreciation can be calculated using the sum of values values for years. This method implies that at the beginning of the depreciation period the underlying asset will be slightly more amortized than at the end. Since it is then new, it is more and more used, so it is quite reasonable that the depreciation costs will be a bit higher in this period. To calculate depreciation using this method, we use the SYD function, whose syntax is:

SYD(<cost>,<salvage>,<life>,<number>)

The first three arguments are the same as for the SLN function, while the last argument is the regular number of periods on which basis the function calculates the depreciation value by the algorithm.