How To Change Formula For Entire Column In Excel What is Depreciation

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What is Depreciation

Depreciation (depn) is used to measure the reduction of an asset’s useful life in dollar terms. The ratio is an estimate because the asset may last longer than the estimated useful life or vice versa. Its purpose is to help a business better reflect the cost of using an asset (excluding maintenance costs) during the asset’s useful life. Without this measure, the profit of the business is reduced or even incurs a loss during the acquisition of the asset and shows a higher profit in the following periods while the asset is still used for business.

Accumulated depreciation is the total reduction in the value of an asset since it was purchased. Assuming you have an asset that you purchased for $9,000 and it has an estimated useful life of 3 years. Two years have passed. The accumulated depn is then two-thirds of the purchase price or $6,000. Using this, you will be able to calculate the book value or residual value of the asset. Continuing from our example, the book value will be $3,000 because the asset is left on the effective estimate for one year.

After 3 years, you can continue to use the asset at “zero cost”. You can continue to use the asset and your net profit (which is the amount after deducting the cost of goods and operating costs) will have increased by the amount of the depn. Although this is not ideal, it is better to understand the total cost of the purchase in one year.

The most common depn method is a straight line. Estimates are made first over the useful life of the asset. The value of the asset is then divided equally (usually monthly) over the life of the project and will be the value of the depn. For many assets, there are already legal standards or recommendations for their useful lives. Most businesses adopt these legal standards. For example, it is a general rule of thumb to depreciate computers and computer peripherals over a 3-year period. Other depn methods include sum-of-the-digits and double declining balance. The depn method of accepting an asset is usually determined by how its value changes over time.

Depreciation can be a major contributor to a company’s profits and losses, especially in businesses that require large investments. For example, in a telecommunications company (telco), a large investment in a telecommunications network is required before the telco can provide its service to the customer. This network once installed can be used by the telco for its services for several years. It is therefore important for the telco to depreciate this value over its useful life so that the company can reflect the true cost of providing the service to its customers. In this case, it is important that the telco business analyst when establishing the business model, to ensure that the depn is calculated correctly or it can completely disrupt the business profit.

Calculating depn is very easy for an Excel based business model if you have a good understanding of the Excel worksheet functions. You only need to use a specific formula and one row to calculate depn instead of using a 36 column by 36 row table to calculate depn for an asset with a useful life of 3 years. Click on this discount link to find out how!

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