Simple Approaches to Building a Depreciation Schedule using Different Methods - Series 2

Picking up from the first part of this series, Babatope dove right into the demo, revisiting the fundamentals of depreciation and why it’s a pivotal skill in financial forecasting. With a blend of storytelling and expert demonstration, he revisited several depreciation methods:

• Straight Line Method: The old reliable, providing a steady depreciation over an asset's useful life.
• Diminishing Balance Method: For those who prefer front-loading their expense to reflect higher initial asset usage.
• Variable Declining Balance: A method that flexibly switches between straight lines and reducing balance, offering a tailored approach depending on the asset's life stage.

Babatope provided live demonstrations on Excel, building schedules from scratch, and answering the 'whys' of each formula used. His methodical explanations on transitioning between different methods using Excel functions like SLN (Straight Line Method) and DDB (Declining Balance) illuminated the path for many.

1. Straight Line Depreciation (SLN Function)

• Function Used: SLN(cost, salvage, life)

Explanation: The Straight Line Depreciation method allocates the cost of an asset evenly over its useful life. Babatope demonstrated how to use the SLN function in Excel, where cost refers to the initial purchase price, salvage is the value at the end of the asset's life, and life is the number of periods over which the asset is depreciated.

Example Application: If an asset costs $5,000, has a salvage value of $0, and a useful life of 5 years, the annual depreciation would be calculated as =SLN(5000, 0, 5).

2. Reducing Balance Method (DDB Function)

• Function Used: DDB(cost, salvage, life, period, factor)

Explanation: This method results in higher depreciation charges at the beginning of an asset's life, which decreases over time. The DDB function was used to demonstrate this, incorporating arguments like cost, salvage, life, period (current period of depreciation), and factor (rate at which the balance declines).

Example Application: For the same asset, using a factor of 2 for a double-declining balance, the first-year depreciation might be calculated as =DDB(5000, 0, 5, 1, 2).

3. Variable Declining Balance Method (VDB Function)

• Function Used: VDB(cost, salvage, life, start_period, end_period, factor, no_switch)

Explanation: VDB allows switching between methods during the asset's life. Babatope highlighted how to use VDB to calculate depreciation for any period, which can switch from straight-line to reducing balance as needed.

Example Application: To calculate depreciation from the first to the third year using VDB without switching to straight-line, the formula might be =VDB(5000, 0, 5, 1, 3, 2, FALSE).

4. Use of Timing and Switching Functions

Explanation: An important part of the webinar focused on the practical application of timing in depreciation calculations. This includes setting the correct start periods for depreciation, especially when new assets are acquired mid-year.

Example Application: Adjusting the depreciation start period based on asset acquisition timing using formula modifications and Excel's date functions..

A Confluence of Theory and Practice

Beyond the formulas and functions, the webinar touched on the philosophical. Babatope emphasized the importance of building depreciation models that are not just accurate but adaptable. He discussed the FAST modeling standard (Flexible, Appropriate, Structured, and Transparent), urging attendees to create models that withstand the test of time and change.

Throughout the webinar, Babatope encouraged interaction through a live Q&A session, where participants could ask specific questions about their scenarios. This allowed for real-time problem-solving and demonstration of formulas based on participant inputs.