Excel Accounting Formulas Demystified for Efficient Financial Analysis

Accounting is all about numbers, crunched in complex reports, and nothing can make reporting easier than Excel accounting formulas. They are designed to calculate accounting equations and every financial ratio you possibly need for budgeting, forecasting, bookkeeping, and analysis. There are more than 50 accounting functions in Microsoft Excel that can make your job easier whether you are an accountant, a seasoned financial analyst, or a small business owner.

In this article, we will present the top Excel accounting formulas that will help you easily generate accounting reports and make the process enjoyable.

 

 

Why should I use Excel accounting formulas?

Before getting into the formulas, you need to understand why you should use them in the first place.

When preparing accounting reports, you will need to calculate many ratios to evaluate business performance. You will face many challenges and questions like “What is the formula for accounting?” or “How should I automate accounting reports?”.

While there are several accounting software programs available in the market primarily intended for generating financial statements, they may lack the flexibility to design and customize reports specific to your requirements. Conversely, if you are constrained by budget, investing in such software can be an expensive affair.

In contrast, the good old Microsoft Excel comes packed with free features and can be customized to your individual needs. Excel accounting formulas are the best of those features because they don’t take as much time as VBA to run, and even better, they return fewer bugs. They are also available in Google Sheets which makes sharing the accounting reports super easy.

 

 

How is Microsoft Excel used for accounting?

Microsoft Excel has many cool features that make it a perfect tool for accounting. You can use PivotTable, PivotChart, or simply Charts in the form of Columns, Bars, Lines, and Waterfalls to tabulate data. But above all, you can use formulas to calculate the ratios and prepare reports.

To use Excel accounting formulas, open Microsoft Excel and go to the “Formulas” tab. From the function categories, choose “Financial,” and you will see a drop-down menu with many (+50) functions.

Image: Top 7 Excel Accounting Formulas

Alt: Excel Accounting Formulas

Here, we will introduce the top 7 Excel accounting functions that will help you get  started on two important areas of asset depreciation and cash flows:

Asset Depreciation Formulas:

1. SLN

Straight Line Depreciation is the simplest method to depreciate an asset value during its useful life; therefore, the depreciation cost will be the same each year.

Excel offers the SLN function to simplify this calculation for you:

SLN (cost, salvage, life)

Cost is the initial price you paid for the asset, salvage is its residual value at the end of its useful life, and life is the number of years the asset will be useful.

Image: SLN is one of the top 7 Excel accounting formulas

Alt: SLN calculates Straight Line Depreciation for assets

2. DB

Decline Balance Depreciation uses a constant rate to depreciate the asset value during its useful life; therefore, depreciation cost will be declining each year.

Excel has the DB function for this method:

DB (cost, salvage, life, period, [month])

Where cost is the book value of the asset at the beginning of the period, salvage is its residual value at the end of the period, life is the number of years the asset will be useful, and period is the accounting year you want to do the calculation for and month is optional in case you need to do the calculation for a partial first year.

Image: DB is one of the top 7 Excel accounting formulas

Alt: DB calculates Decline Balance Depreciation for assets

3. VDB

Variable Declining Balance depreciates an asset value by combining the declining balance and the straight-line methods. The calculation starts with the former method and switches to the later method when depreciation is greater than the declining balance.

Excel has the VDB formula for this calculation:

VDB (cost, salvage, life, start_period, end_period, [factor], [no_switch])

Where cost is the book value of the asset at the beginning of the period, salvage is its residual value at the end of the period, life is the number of years the asset will be useful, and start and end periods are the accounting years you want to calculate the depreciation for, and factor and no-switch are optional in case you want to control the switching behavior.

Image: VDB is one of the top 7 Excel accounting formulas

Alt: VDB calculates Variable Declining Balance depreciation for assets

4. SYD

Sum-of-Years Digits depreciate the asset value in the first few years of its useful life, and that is why it is also called the accelerated depreciation method.

Excel offers the SYD formula for this method among many Excel accounting formulas:

SYD (cost, salvage, life, period)

Where cost is the asset’s book value at the beginning of the period, salvage is its residual value at the end of the period, life is the number of years the asset will be useful, and period is the accounting year you want to calculate.

Image: SYD is one of the top 7 Excel accounting formulasf

Alt: SYD calculates Sum-of-Years Digits depreciation for assets

Cash flow Formulas:

5. XNPV

Net Present Value is a common accounting ratio that calculates the value of future cash flows discounted to the present.

Excel has the XNPV formula to ease the calculation for non-periodic dates:

XNPV (discount_rate, cash_flows, dates)

Where discount_rate is the percentage applied to the cash flows, cash_flows are a series of scheduled payments in the future, and dates are the days’ payments are due.

Image: XNPV is one of the top 7 Excel accounting formulas

Alt: XNPV calculates the Net Present Value of future cash flows with non-periodic dates

6. XIRR

Internal Rate of Return is an important finance metric that calculates the rate of return of a potential investment.

Excel has the XIRR formula for this calculation with non-periodic dates:

XIRR (cash_flows, dates, [estimated_irr])

Where cash_flows are a series of scheduled payments in the future, dates are the days’ payments are due, and estimated_irr is your optional guess of the internal rate of return.

Image: XIRR is one of the top 7 Excel accounting formulas

Alt: XIRR calculates the Internal Rate of Return of future cash flows with non-periodic dates

7. MIRR

Modified Internal Rate of Return is a major finance ratio to calculate the rate of return for a potential reinvestment of the cash earned from another investment.

Excel offers the MIRR formula for your convenience:

MIRR (cash_flows, finance_rate, reinvest_rate)

Where cash_flows are a series of scheduled payments on periodic dates, finance_rate is the cost of borrowing or the rate of return on cash flows, and reinvest_rate is the interest rate on the reinvestment.

Image: MIRR is one of the top 7 Excel accounting formulas

Alt: MIRR calculates the Modified Internal Rate of Return of future cash flows with periodic dates

If you need ideas or inspiration, you can find many well-designed Excel accounting templates on the Microsoft Office website that use accounting functions. And when designing your own template, always remember the following Pro tips:

• Use the shortest way to write formulas.
• Use the SUM function to add numbers instead of the ‘+’ sign.
• Use a good format cells option.

 

 

Closing thoughts

Excel accounting formulas are the ultimate tool for every accountant, finance analyst, or business without spending too much money on software. They are easy to use while simplifying reporting.

To download our useful Excel accounting formulas, click here (a link to our subscription page for the newsletter, if we have any) or talk to our Excel Consultants for a superior customized Solution.