Depreciation and Amortization — Microsoft Excel
In this article, we will walk you through the core concept of depreciation and amortization, In finance and accounting depreciation and amortization is very important so, we can understand it’s important, why we use and how it works and impact in finance/accounting.
Let’s Dive In
Depreciation and Amortization
Depreciation and amortization are the two methods of calculating the fixed assets and intangible assets for an accounting period, which is usually annual. Depreciation is used for fixed assets and amortization is used for intangible assets to calculate the depreciated value of both types of assets. These are the part of the income statement in the expenses block.
Examples of fixed assets are buildings, equipment, furniture, vehicles, and machinery.
Examples of intangible assets are patents, trademarks, goodwill, franchise agreements and copyrights. Fixed assets have their salvage value after a period of useful life. On the other hand,
intangible assets don’t have any salvage value due to their physical non existence. So, depreciation is calculated by subtracting the salvage value of fixed assets.
Intangible assets usually calculate the amortization value by the straight-line method. Several methods are used to determine a fixed asset’s depreciated value over time.
Straight-line method: The most common depreciation method used to spread out the depreciation of an asset evenly over time.
Declining balance (Written Down Value): An accelerated accounting method that shows how depreciation decreases the value of a fixed asset.
Double-declining balance: Another accelerated depreciation method in which the value of an asset depreciates at twice the rate than with the straight-line method.
Units of production: This depreciation method accounts for the number of units an asset produces rather than focusing on the years it is used for.
Sum-of-years-digits: Another way to calculate accelerated depreciation for an asset that factors in the asset’s original cost, salvage value and useful years of life. We will work only on the Straight Line Method (SLM) and Written Down Value
(WDV) whenever required.
Let’s take an example of SLM and WDV to understand more about these terms.
The above figure, shows that the initial value of an asset is ₹1,00,000/- and the residual
value is ₹5000. Still, the depreciation calculation and figures in both methods are
also different.
The rate of depreciation is different in both cases. The depreciated amount is ₹9,500/- every year in the SLM method, while the depreciated amount is ₹25,887/- in year 1
and decreases to ₹1,746/- in year 10 in WDV Method.
Conclusion
Finally, we will understanding the fundamentals of depreciation and amortization, we will discussing why it is important in accounting and finance and how we calculate them and also we covered some glimpses of equations that we used in excel for making any financial projection.
