Introduction
Depreciation is the process of allocating the cost of a fixed asset over its useful life. It helps businesses to understand the actual value of their assets and make accurate financial statements. Two common methods of calculating depreciation are the Straight Line Method (SLN) and the Declining Balance Method (DB). Microsoft Excel provides built-in functions to calculate depreciation using these methods easily.
What is SLN (Straight Line) Method of Depreciation?
The Straight Line Method spreads the cost of the asset equally over its useful life. It is the simplest and most commonly used method.
Formula:
SLN = (Cost - Salvage Value) / Useful Life
Example:
If you buy a machine for Rs. 10,000, expect to use it for 5 years, and estimate the salvage value to be Rs. 2,000, then:
SLN = (10,000 - 2,000) / 5 = Rs. 1,600 per year
Key Features:
- Equal depreciation each year
- Easy to calculate and understand
- Used for assets that lose value evenly
What is DB (Declining Balance) Method of Depreciation?
The Declining Balance Method is an accelerated depreciation method. It means the asset loses more value in the earlier years and less in later years.
Formula:
DB = Book Value at Beginning of Year × Depreciation Rate
This rate depends on the useful life of the asset.
Example:
If a machine costs Rs. 10,000 and has a useful life of 5 years, using the Double Declining Balance method (which uses twice the straight-line rate), the depreciation for the first year would be:
Rate = (1/5) × 2 = 40%
DB = 10,000 × 40% = Rs. 4,000 in year 1
Key Features:
- Higher depreciation in earlier years
- Lower depreciation in later years
- Useful for assets that quickly lose value like electronics
Difference between SLN and DB Method
| Feature | SLN Method | DB Method |
|---|---|---|
| Depreciation Amount | Same every year | Decreases every year |
| Complexity | Simple | More complex |
| Used For | Assets with constant use | Assets that lose value quickly |
| Excel Function | SLN() | DB() |
How to Use SLN and DB in MS Excel
Excel provides two functions for calculating depreciation:
1. SLN Function
=SLN(cost, salvage, life)
Example: =SLN(10000, 2000, 5) gives Rs. 1,600 per year
2. DB Function
=DB(cost, salvage, life, period, [month])
Example: =DB(10000, 2000, 5, 1) gives the depreciation for the first year
Note: The DB function calculates depreciation for one period at a time, so you need to use it for each year separately.
Conclusion
Understanding SLN and DB methods helps businesses choose the right way to handle asset depreciation. SLN is simple and consistent, while DB is useful for assets that lose value faster. With Excel functions like SLN() and DB(), performing these calculations becomes easy, quick, and accurate.