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Many users take advantage of Excel's Formula Auditing functions to identify circular referencing formulas and change them so that the circular references disappear.

By accessing Excel's Options and choosing the Formulas tab, you can check the box labeled Enable iterative calculation as shown in Figure 2.

Enabling iterative calculations causes Excel to calculate worksheets containing circular referencing formulas up to the number of times specified in the Maximum iterations field, or until the value change in the Maximum change field is reached.

Though 100 iterations is the default maximum number of iterations and 0.001 is the default maximum change value, usually Excel reaches sufficiently accurate results in as few as three iterations.

Returning to the worksheet presented in Figure 1, we find that after enabling iterative calculations in the workbook, the formulas function properly and calculate the correct amount of tax for both the federal and state income tax returns, as shown in Figure 3.

Though it is usually preferable to avoid circular references, they will appear occasionally when building complex calculations.

One common example is in tax accrual calculations, where federal income tax is deductible on state tax returns.

Here, since federal tax is deductible on the state return, and state tax is deductible on the federal return, a circular reference exists by the very nature of the calculation.

By default, Excel treats such calculations as errors.

In this tip, you will learn how to enable circular, or iterative, calculations.

An iteration is repeatedly recalculating a worksheet until a specific numeric condition is met.

Excel cannot calculate a formula that refers to the cell – either directly or indirectly – that contains the formula.

This is called a circular reference and circular references, by default, can iterate indefinitely, leading to errors in worksheets, as shown in Figure 1.

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