Top Excel accounting formulas Part 1

Here are some of the most useful ways for accountants to use Excel formulas and functions:

1. Asset depreciation

The term depreciation refers to an accounting method used to allocate the cost of a
tangible or physical asset over its useful life. Depreciation represents how much of an asset's
value has been used. It allows companies to earn revenue from the assets they own by
paying for them over a certain period of time.

Accountants can calculate asset depreciation to find the amount of value an asset loses over
time. Excel offers five methods for calculating asset depreciation:

1.1 SLN(cost, salvage, life): The straight-line depreciation calculation can be used to

demonstrate an asset's value lowering by a fixed period of time over its life.

The SLN function syntax has the following arguments:

·         Cost (required argument) The initial cost of the asset.

·         Salvage (required argument) The value at the end of the depreciation (sometimes
called the salvage value of the asset).

·         Life (required argument) The number of periods over which the asset is depreciated
(sometimes called the useful life of the asset).

Example: John’s asset cost is $5,000 and has a residual value of $100 after 10 years,
calculate the straight-line depreciation.

=SLN(5000, 100, 10 ) = $490

A few notes about the SLN Depreciation Function

1.      #DIV/0! error – Occurs if the given life argument is equal to zero.

2.      #VALUE! error – Occurs if any of the given argument is non-numeric.

1.2  DB(cost, salvage, life, period, month): The decline balance depreciation method can be
used to reduce an asset's value by a fixed percentage. The month value is optional.
The DB function syntax has the following arguments:

·         Cost (required argument) – This is the initial cost of the asset.

·         Salvage (required argument) – The value of the asset at the end of the depreciation.

·         Life (required argument) – This is the useful life of the asset or the number of periods
for which we will be depreciating the asset.

·         Period (required argument) – The period for which we wish to calculate the

depreciation for.

·         Month (optional argument) – Specifies how many months of the year are used in the
calculation of the first period of depreciation. If omitted, the function will take the default
value of 12.

Example:

As per the record Juan found out that the cost of his car is $12,500 and after 15 years, it will
have a residual value of $180. Calculate the declining balance depreciation of the asset
during year 1.

=DB(12500, 180, 15, 1) = $3,075

Things to remember about the DB Function

1. #VALUE! error – Occurs when the given arguments are non-numeric.

2. #NUM! error – Occurs when:

o The given cost or salvage argument is less than zero.

o The given life or period argument is less than or equal to zero.
o The given month argument is less than or equal to zero or is greater than 12.
o The given period argument is greater than the life argument and we omitted the
month argument.
o The given period is greater than life+1. For example, if the life of the asset is 5 years
and we provided the period argument as 6 years with 12 months as the month
argument.

 
1.3  DDB(cost, salvage, life, period, factor): Double decline balance depreciation is another
Excel method that can double the rate of straight-line depreciation. The factor value is
optional.

The DDB function syntax has the following arguments:

§  Cost (required argument). The initial cost of the asset.

§  Salvage (required argument). The value at the end of the depreciation (sometimes called
the salvage value of the asset). This value can be 0.

§  Life (required argument). The number of periods over which the asset is being
depreciated (sometimes called the useful life of the asset).

§  Period (required argument). The period for which you want to calculate the depreciation.
Period must use the same units as life.

§  Factor (optional.) The rate at which the balance declines. If factor is omitted, it is assumed
to be 2 (the double-declining balance method).

Example: Assuming that the value of your plane in the market is 28,000 and it will receive a
residual value of $325 after a decade, Calculate the double declining balance depreciation
of the asset during year 1.

=DDB(28000, 325, 10, 1) = $5,600

Return Value

The DDB function returns a numeric value in currency format.

Errors

1. If the arguments are non-numeric value, the function returns #VALUE! error value.

2. If anyone of below occurs, the function returns ##NUM! error value:

·         Cost < 0, or salvage < 0;

·         Life or period <= 0;

·         Factor <=0;

·         Period > life.

 

1.4  VDB(cost, salvage, life, start period, end period, factor, no switch): Variable decline
balance can show depreciation over a user-specified period. The factor and no switch values
are optional.

The VDB function syntax has the following arguments:

·         Cost (required argument) – This is the initial cost of the asset.

·         Salvage (required argument) – This is the value of an asset at the end of the

depreciation. It can be zero. It is also known as the salvage value.

·         Life (required argument) – This is the useful life of the asset or the number of periods
for which the asset will be depreciated.

·         Start_period (required argument) – The starting period for which you want to

calculate the depreciation. Start_period must use the same units as life.

·         End_period (required argument) – This is the ending period for which you want to
calculate the depreciation. End_period must use the same units as life.

·         Factor (optional argument) – This is the rate of depreciation. If we omit the argument,

the function will take the default value of 2, which denotes the double declining balance
method.

·         No_switch – This is an optional logical argument that specifies whether the method
should switch to straight-line depreciation when depreciation is greater than the declining
balance calculation. Possible values are:
TRUE – Excel will not switch to the straight-line depreciation method;
FALSE – Excel will switch to the straight-line depreciation method when depreciation is
greater than the declining balance calculation.

Example for Computation in Years

Calculate the depreciation during different periods, of an asset that costs $10,000 at the
start of year 1, and has a salvage value of $1,000 after 5 years.
Note that the sum of the depreciations from year 1, years 2 & 3, and years 4 & 5 add up to
$9,000, so the asset value at the end of year 5 is,

$10,000 - $9,000 = $1,000

which, as expected, is the specified salvage value.

This first example returns the depreciation for an asset that costs $10,000, with a salvage
value of $5,000. The useful life of the asset is 5 years. The depreciation is being calculated
for the 6th to 12th month time frame. A factor of 2 is used.     

Answers

Day = $65.14

Month = $1,509.79

Things to remember about the VDB Function

1. We need to provide arguments “period” and “life” in the same units of time: years,
months, or days.
2. All arguments except no_switch must be positive numbers.
3. #VALUE! error – Occurs when the given arguments are non-numeric.
4. #NUM! error – Occurs when:

o Any of the supplied cost, salvage, start_period, end_period or [factor] arguments are
< 0;
o The given life argument is less than or equal to zero;
o The given start_period is > the given end_period; and
o Start_period > life or end_period > life.

1.5 SYD(cost, salvage, life, per): The sum-of-years' digits depreciation can also show the
declining value of an item.

The SYD Function is an Excel Financial function. SYD is short for sum of years digits. This

function helps in calculating the depreciation of an asset, specifically the sum-of-years’
digits depreciation for a specified period in the lifetime of an asset.
The SYD function is helpful to a financial analyst when building financial models or creating
a fixed asset depreciation schedule for analysis.

=SYD(cost, salvage, life, per)

The function uses the following arguments:

1. Cost (required argument) – The initial cost of the asset.

2. Salvage (required argument) – This is the value of the asset at the end of the
depreciation. It can be zero. It is also known as the salvage value.
3. Life (required argument) – This is the useful life of the asset or the number of
periods for which the asset will be depreciated.
4. Per (required argument) – The period for which we want to calculate the
depreciation.

Example:

John’s asset cost is $5,000 and has a residual value of $100 after 10 years, we can calculate
the declining balance depreciation of the asset during year 1 to 5

=SYD(5000, 100, 10, 1) = $890.91

Year 1 = 890.91

Year 2 = 801.82

Year 3 = 712.73

Year 4 = 623.64

Year 5 = 534.55

Things to remember about the SYD Function

1. We need to provide the arguments life and per in the same units of time: days,

months, or years.
2. #VALUE! error – Occurs when the given arguments are non-numeric.
3. #NUM! error – Occurs when:

o The salvage argument provided is less than zero.

o The life or per argument given is less than or equal to zero.
o The per argument provided is greater than the life argument provided in the
formula.
 

2. Annual interest rate

What is the RATE Function?

The RATE Function is an Excel Financial function that is used to calculate the interest rate
charged on a loan or the rate of return needed to reach a specified amount on an
investment over a given period.

For a financial analyst, the RATE function can be useful to calculate the interest rate on zero
coupon bonds.

Formula

=RATE(nper, pmt, pv, [fv], [type], [guess])

The RATE function uses the following arguments:

1. Nper (required argument) – The total number of periods (months, quarters, years,

etc.) over which the loan or investment is to be paid.
2. Pmt (required argument) – This is the payment for each period. This number must be
unchanged over the life of the loan. Pmt includes principal and interest but no other
fees or taxes. If pmt is omitted, fv must be inputted.
3. PV (required argument) – The present value of all future payments; what all future
payments would be worth in the present.
4. FV (optional argument) – This is the future value that is the goal of the investment.
This value is what we aim to have after the last payment is made. If we omit fv, it is
assumed to be 0 (the future value of a loan, for example, is 0) and we must include a
pmt argument instead.
5. Type (optional argument) – Determines how the formula will consider the due dates
for payments. If type is omitted or 0 is inputted, payments are due at period end. If 1
is inputted, payments are due at period beginning.
6. Guess (optional argument) – Our guess of what the interest rate should be. This
provides a start point for the RATE function so that it may converge on an answer
easier before reaching 20 iterations.
1. When omitted, RATE assumes the guess to be 10%.
2. If RATE does not converge, attempt other values for this input.

Note:
1.      The Pmt should be negative (-) if the situation is calculated from the perspective of the
person taking on the loan.

2.      If the calculation was from the perspective of the bank or person that give the loan, PV
should have negative sign (-).

3.      If you’re going calculate for the annual rate your need to multiply your equation to 12
(12 months in 1 year)

You are taking out a loan of $8,000. The loan term is 5 years and payments are made
monthly. Loan payments are $152.50. What would the interest rate be for this loan?

Annual Rate = 5.42%

Monthly Rate = 0.45

With this, we can determine that the annual interest rate for this loan is 5.42%. You will
notice that Pmt is set to negative in the formula. This is because this calculation is from the
perspective of the person taking on the loan. Translating this formula, Pmt is the monthly
payment amount. It is the cash outflow that the individual must pay every month. Therefore,
he is losing Pmt, thus causing it to be a negative number.

If this situation was to be calculated from the perspective of the bank issuing the loan to the
borrower, Pmt would instead be a positive and PV would be the negative number. This is
because the loan would be gaining Pmt on a monthly basis (cash inflow of monthly
payments). It would also be losing the initial loan amount, thus causing PV to be the
negative number instead.

Example: Misha's client wants to know what her annual interest rate is on a $7,000 loan that
she pays off with $350 per month for two years. Misha uses the function =RATE(24, 350, -
7,000)*12 to determine that the loan's annual interest rate is 18.16%.

3. Compound interest

Compound interest is the inclusion of interest in a loan's principal sum. Sometimes it's
described as interest earned on interest. You can use a compound interest formula in Excel
to find an investment's future value.
Formula: p * (1+r)^n

P: This stands for the principal loan amount

R: This is the loan's interest rate.

N: This is the investment period for the loan.

Example: If Jackie takes out a personal loan of $500 to be paid at 8% over two years, she
could use Excel to calculate her compound interest.

Using the formula =500*(1+8%)^2, she could find that her compound interest on the loan
would be $583.20.

4. Mortgage payments

Mortgage - a legal agreement by which a bank or other creditor lends money at interest in
exchange for taking title of the debtor's property, with the condition that the conveyance of
title becomes void upon the payment of the debt.

Accountants can use the PMT function to determine the cost of a mortgage payment.

Formula: PMT(rate, nper, pv, fv, type)

Rate: This is the interest rate for the loan.

Nper: Nper stands for the number of loan payments due.

PV: This is the loan's principal amount.

FV: This value represents the cash balance after last installment. This value is optional. If you
don't include an fv value, it defaults to zero.

Type: This represents when the loan payment is due. This value is also optional. A value of
one represents the beginning of the payment period and a value of zero represents the end
of the payment period.

=-PMT(annual interest rate/12, loan term*12, loan amount)

The minus sign before the PMT function is needed since the formula returns a negative
number. For the interest rate, we use the monthly rate (annual rate divided by 12), then we
calculate the number of periods (360 months which is 30 years multiplied by 12 months).
Finally, we insert the principal borrowed (the difference between the cost of the house and
the down payment).

Example: Marjorie's client wants to buy a home with a 30-year, $100,000 mortgage loan to
be repaid monthly. The loan's interest rate is 7%. Marjorie uses the formula =PMT(7%/12,
360, -100000) to find that her client would owe a monthly payment of $665.30.

Things to remember when you calculate monthly

payments
There are a few things to watch out for when working with Excel functions like PMT, PPMT,
or IPMT:

 be consistent when setting your arguments;

 use the negative sign to convert the result to a positive number;
 if your payments are made monthly, make sure to divide the annual rate by 12;
 if your loan term is expressed in years and the payments are made monthly, make
sure to multiply the loan period by 12;

PART 2

Top Excel accounting formulas Part 2

Here are some of the most useful ways for accountants to use Excel formulas and functions:

1. Future value of investments

Accountants can use the future value function to find the value of an investment in the
future.

The FV Function in Excel formula is categorized under Financial functions. This function

helps calculate the future value of an investment.

As a financial analyst, the FV function helps calculate the future value of investments made
by a business, assuming periodic, constant payments with a constant interest rate. It is
useful in evaluating low-risk investments such as certificates of deposit or fixed rate
annuities with low interest rates. It can also be used in relation to interest paid on loans.

The Formula

=FV(rate,nper,pmt,[pv],[type])

This function uses the following arguments:

1. Rate (required argument) – This is the interest rate for each period.

2. Nper (required argument) – The total number of payment periods.
3. Pmt (required argument) – This specifies the payment per period. If we omit this
argument, we need to provide the PV argument.
4. PV (required argument) – This specifies the present value (PV) of the
investment/loan. The PV argument, if omitted, defaults to zero. If we omit the
argument, we need to provide the Pmt argument.
5. Type (optional argument) – This defines whether payments are made at start or end
of the year. The argument can either be 0 (payment is made at the end of the period)
or 1 (the payment is made at the start of the period).

Things to remember about the FV Function

1. If the pmt argument is for cash going out of a business, the payment value will be
negative. For cash received, it must be positive.
2. #VALUE! error – Occurs when any of the given arguments is non-numeric.
3. Make sure that the units of rate and nper are consistent. If we make monthly
payments on a five-year loan at an annual interest of 10%, we need to use 10%/12
for rate and 5*12 for nper. If we make annual payments on the same loan, then we
would use 10% for rate and 5 for nper.

2. Effective annual interest rate

Accountants can use the EFFECT formula to determine the effective annual interest rate on a
loan.

Formula: EFFECT(nominal_rate, npery)

Nominal_rate: This is the nominal interest rate or the interest rate before inflation.

Npery: This is the number of annual compounding periods or the number of times per
payment period that interest is added to a loan.
The EFFECT Function is categorized under Excel Financial functions. It will calculate the
annual interest rate with the number of compounding periods per year. The effective annual
interest rate is often used to compare financial loans with different compounding terms.

As a financial analyst, we often need to make decisions on which financial loan will be best
for a company. The EFFECT function will be helpful in such scenario and will facilitate
comparisons, ultimately helping in making a decision.

Formula

=EFFECT(nominal_rate, npery)

The EFFECT function uses the following arguments:

1. Nominal_rate (required argument) – This is the nominal or stated interest rate.

2. Npery (required argument) – This is the number of compounding periods in one
year.

Things to remember about the EFFECT Function

1. #VALUE! error – Occurs when:

o The nominal rate argument is not a numeric value.

o The npery argument is not a proper numeric value.
o Any of the arguments provided is non-numeric.

#NUM! error – Occurs when:

o The given nominal rate argument is less than or equal to 0.

o The given npery is less than or equal to 0.

If npery is in decimal format, it is truncated to integers. The EFFECT function is related to the
NOMINAL function through Effective rate = (1+(nominal_rate/npery))*npery – 1.
 

3. Fixed loan payment interest

You can calculate the portion of interest on a loan payment that's fixed using the IPMT
function in Excel.
Formula: IPMT(rate, per, nper, pv, fv, type)

Rate: This is the interest rate for the loan.

Per: This is the period for the interest.

Nper: Nper stands for the number of loan payments due.

PV: This is the loan's principal amount.

FV: This value represents the cash balance after last installment. This value is optional.

Type: This represents when the loan payment is due. This value is also optional.

What is the IPMT Function?

The IPMT Function is categorized under Excel Financial functions. The function calculates the
interest portion based on a given loan payment and payment period. We can calculate,
using IPMT, the interest amount of a payment for the first period, last period, or any period
in between.

As a financial analyst, we will often be interested in knowing the principal component and
interest component of a loan payment for a specific period. IPMT helps to calculate the
amount.

Formula

=IPMT(rate, per, nper, pv, [fv], [type])

The IPMT function uses the following arguments:

1. Rate (required argument) – This is the interest per period.

2. Per (required argument) – This is the period for which we want to find the interest
and must be in the range from 1 to nper.
3. Nper (required argument) – The total number of payment periods.
4. Pv (required argument) – This is the present value, or the lump sum amount, that a
series of future payments is worth as of now.
5. Fv (optional argument) – The future value or a cash balance that we wish to attain
after the last payment is made. If we omit the Fv argument, the function assumes it
to be zero. The future value of a loan would be taken as zero.
 6. Type (optional argument) – Accepts the numbers 0 or 1 and indicates when
payments are due. If omitted, it is assumed to be 0. Set type to 0 if payments are at
the end of the period, and to 1 if payments are due at the start.

Things to remember about the IPMT function

1. We need to ensure that the units we use for specifying the rate and nper arguments
are proper. If we make monthly payments on a 4-year loan at 24% annual interest,
we need to use 24%/12 for rate and 4*24 for nper. If you make annual payments on
the same loan, use 24% for rate and 4 for nper.
2. Cash paid out (as on a loan) is shown as negative numbers. Cash received (as from
an investment) is shown as positive numbers.
3. #NUM! error – Occurs if the supplied per argument is less than zero or is greater
than the supplied value of nper.
4. #VALUE! error – Occurs when any of the given arguments are non-numeric.

4. Cash flows

You can use the MIRR function in Excel to calculate cash flows for a company. It stands for
modified internal rate of return.

Function: MIRR(cash_flows, finance_rate, reinvest_rate)

Cash_flows: The first parameter refers to cells that contain cash flows.

Finance_rate: This is the rate of return (or the discount rate), shown as a percentage.

Reinvest_rate: This is a percentage that represents the interest rate received on reinvested

cash flows.

What is MIRR?
The Modified Internal Rate of Return (MIRR) is a function in Excel that takes into account the
financing cost (cost of capital) and a reinvestment rate for cash flows from a project or
company over the investment’s time horizon.

The standard Internal Rate of Return (IRR) assumes that all cash flows received from an
investment are reinvested at the same rate.  The Modified Internal Rate of Return (MIRR)
allows you to set a different reinvestment rate for cash flows received.  Additionally, MIRR
arrives at a single solution for any series of cash flows, while IRR can have two solutions for
a series of cash flows that alternate between negative and positive.

What is the Modified Internal Rate of Return (MIRR) Formula in Excel?

The MIRR formula in Excel is as follows:

=MIRR(cash flows, financing rate, reinvestment rate)

Where:

 Cash Flows – Individual cash flows from each period in the series
 Financing Rate – Cost of borrowing or interest expense in the event of negative cash
flows
 Reinvestment Rate – Compounding rate of return at which positive cash flow is
reinvested

5 things you should know about MIRR in Excel

Before you go to calculate modified IRR in your Excel worksheets, here's a list of useful
points to remember:

 The values must contain at least one positive (representing income) and

one negative (representing outlay) number; otherwise a #DIV/0! error occurs.
 The Excel MIRR function assumes that all cash flows happen at regular time
intervals and uses the order of values to determine the order of cash flows. So, be
sure to enter the values in chronological order.
 It is implicitly implied that all cash flows happen at the end of a period.
 Only numeric values are processed. Text, logical values and empty cells are ignored;
however, zero values are processed.
 A common approach is to use the weighted average cost of capital as
the reinvest_rate,

5. Internal rate of return

Accountants can use the IRR function to calculate the internal rate of return for cash flows.

Function: IRR(values, guess)
Cash_flows: This is a reference to cells that contain a company's cash flows. For example,
(D6:D11).

Guess: This optional parameter is the user's guess for the internal rate of return.

What is the IRR Function?

The IRR Function[1] is categorized under Excel Financial functions. IRR will return the Internal
Rate of Return for a given cash flow, that is, the initial investment value and a series of net
income values.

The function is very helpful in financial modeling, as it helps calculate the rate of return an
investment would earn based on a series of cash flows. It is frequently used by businesses to
compare and decide between capital projects.

What is the IRR Function?

The IRR Function is categorized under Excel Financial functions. IRR will return the Internal
Rate of Return for a given cash flow, that is, the initial investment value and a series of net
income values.

The function is very helpful in financial modeling, as it helps calculate the rate of return an
investment would earn based on a series of cash flows. It is frequently used by businesses to
compare and decide between capital projects.

IRR Formula

=IRR(values,[guess])

The IRR function uses the following arguments:

1. Values (required argument) – This is an array of values that represent the series of

cash flows. Cash flows include investment and net income values. Values can be a
reference to a range of cells containing values.
2. [Guess] (optional argument) – This is a number guessed by the user that is close to
the expected internal rate of return (as there can be two solutions for the internal rate
of return). If omitted, the function will take a default value of 0.1 (=10%).

Notes

1. The argument value should contain at least one positive and one negative value to
calculate the internal rate of return.
 2. The IRR function uses the order of the values to interpret cash flows. Hence, it is
necessary to enter the payments and income values sequentially.
3. If the array or reference argument contains logical values, empty cells or text, those
values are ignored.

Things to remember about the IRR Function

1. #NUM! error – Occurs when:

1. If the given value array does not contain at least one negative and one
positive value
2. The calculation fails to converge after 20 iterations. If the internal rate of
return is unable to find a result that works after 20 tries, then the #NUM! error
value is returned.
2. IRR is closely related to the NPV (Net Present Value) function. The rate of return
calculated by IRR is the discount rate corresponding to a $0 (zero) NPV.

5.      Accrued interest

Accountants can use the ACCRINT function to calculate the accrued interest over a time
period for a security, like a bond.

Function: ACCRINT(id, fd, sd, rate, par, freq, basis, calc)

id: This is the issue date for the security.

fd: This represents the first interest date of the security.

sd: This is the settlement date for the security.

rate: This represents the security's interest rate.

par: This is the security's par value, or its face value.

freq: This is the number of payments per year.

basis: This optional parameter controls how Excel counts days using this function.

calc: This optional parameter controls how Excel calculates the method.

What is the ACCRINT Function?
The ACCRINT Function is an Excel Financial function. The function will calculate the accrued
interest for a security that pays interest on a periodic basis.

ACCRINT helps users calculate the accrued interest on a security, such as a bond, when that
security is sold or is transferred to a new owner on a date other than the issue date or on a
date that is an interest payment date.

The ACCRINT function was introduced in MS Excel 2007 and hence is not available in earlier
versions.

Formula

=ACCRINT(issue, first_interest, settlement, rate, par, frequency, [basis], [calc_method])

The ACCRINT function uses the following arguments:

1. Issue (required argument) – This is the security’s issue date.

2. First_interest (required argument) – This is the first interest date of the security.
3. Settlement (required argument) – The security’s settlement date. It is the date after
the issue date when the security is traded to the buyer.
4. Rate (required argument) – The security’s annual coupon rate.
5. Par (required argument) – The security’s par value. If omitted by the user, the
function will take the par value as $1,000.
6. Frequency (required argument) – This is the number of coupons payments per year.
The function will take for annual payments, frequency = 1; for semiannual, frequency
= 2; for quarterly, frequency = 4.
7. Basis (optional argument) – This is the kind of day count that is used for calculating
the interest on a given security. If we omit the argument, the basis is set to 0. Basis
can be any of the following values:
8. Calc_method (optional argument) – It is either 0 (calculates the accrued interest
from first_interest_date to settlement_date) or 1 (calculates the accrued interest from
issue_date to settlement_date).

Things to remember about the ACCRINT Function 

1. #NUM! error – Occurs when:

o The given rate argument is ≤ 0 or the provided [par] argument is ≤ 0.

o The given frequency argument is not equal to 1, 2, or 4.
o We provided issue ≥ settlement.
o The given basis argument is not equal to 0, 1, 2, 3, or 4.

2. #VALUE! error – Occurs when:

o The given issue, first_interest, or settlement arguments are not valid dates.
o Any of the arguments provided is non-numeric.

3. When we input the issue and settlement dates, they should be entered as either:

o References to cells that contain dates; or

o Dates that are returned from formulas; or
o If we attempt to input these date arguments as text, Excel may incorrectly interpret
them, due to different date systems or date interpretation settings.