Sum of Years’ Digits Depreciation

This approach requires a larger number of calculations and may be difficult for management to implement. However, the additional work is likely justified by the benefits of using more accurate numbers that provide a better match between Depreciation expense and revenue. Accelerated depreciation is also appropriate for assets that have higher repair expenses in later years.

As such, most of the cost of these assets should be allocated to these same early years. For example, suppose that a company purchases equipment on 1 October of the current year. For MACRS and ACRS the salvage value is
not applied to depreciation of U.S. tax and commercial books. To understand this last step, let’s change the assumptions of the earlier example. Use of our products and services are governed by our Terms of Use and Privacy Policy. Someone on our team will connect you with a financial professional in our network holding the correct designation and expertise.

Sum of Years Depreciation (SYD)

Therefore, charging higher depreciation costs early on and decreasing depreciation charges in later years reflects the reality of an asset’s changing economic usefulness over time. A problem with using this or any other accelerated depreciation method is that it artificially reduces the reported profit of a business over the near term. The result is excessively low profits in the near term, followed by excessively high profits in later reporting periods. It is also more complex to calculate than straight-line depreciation, which can lead to errors in the calculation. Before calculating how much depreciation is charged to each accounting period in Step 5, we first need to calculate the depreciation expense for each year of the asset life. We need to count the remaining useful life from the asset’s timeline rather than the accounting periods’ perspective.

To return the value of one period of the sum of the years’ digits depreciation expense. This method results in larger depreciation expenses in the earlier years of an asset’s life and smaller expenses in the later years, reflecting the fact that assets tend to lose value more quickly when they are new. It is expected that machine has a useful life of 5 years at the end of which residual value will be $30,000.

Formulas

In this method, the depreciation is calculated by putting the formula (No. of years of the remaining life of asset/ Total of all digits of life of the asset). The sum-of-years digits method of depreciating assets has the effect of increasing the value of net income because it discounts expenses over time. This has the effect of making profits higher than they would be if they were calculated using the more traditional approach of straight-line Depreciation. It’s also referred to as a non-cash expense because the cash used to buy the asset left the company when it was purchased. Depreciation allows the cost of a balance sheet item (an asset) to flow smoothly to the income statement (an expense) over its serviceable life. In the second accounting period ending on 31 December 2021, 9 months out of the first year of the asset overlaps as well as 3 months out of the asset’s second year.

• To demonstrate how this fraction is worked out, suppose that an asset has a 5-year life.
• The sum-of-years digits method of depreciating assets has the effect of increasing the value of net income because it discounts expenses over time.
• In general terms, the sum of year’s digits method of depreciation can be a little problematic for the company because the depreciation is being captured at a higher rate at the beginning of the year.
• For the next year of the asset’s life that ends on 30 September 2022 (Year 2), the remaining useful life will be counted as 3 years.
• Second, you’ll calculate the salvage value of the asset, which works the same for both the SYD and straight-line depreciation methods.

The primary advantage of this method is that it provides a more accurate trend for Depreciation expenses. That is, the expense tends to be higher in early years, which makes sense if an asset gives up its benefits faster earlier on. The only guideline is that the depreciation method should be systematic and rational, and as we noted, all of the depreciation methods discussed so far meet this requirement. To demonstrate how this fraction is worked out, suppose that an asset has a 5-year life.

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For calculating depreciation for the first accounting period that ends on 31 December 2020 (Year 1), the remaining useful life of the delivery truck will be taken as 4  years. For the next accounting period that ends on 31 December 2021 (Year 2), the remaining useful life will be 3 years. The remaining useful life is the only value in the SYD depreciation formula that varies from one accounting period to another.

Using the depreciation formula, we can calculate the amount of depreciation for each year of the asset’s life using the values calculated in Steps 1 to 3. For example, to calculate the depreciation of an asset with a useful life of 3 years, we will count the remaining useful life of 3 wave accounting review years in year 1, 2 years in year 2, and 1 year in year 3. The sum of years’ digits is simply an addition of all numbers between zero and the number of years of an asset’s useful life. In this method, it is being assumed that the productivity of the asset will decrease as time passes.

Sum of Years’ Digits Method of Assets Depreciation FAQs

Use this calculator to calculate an accelerated depreciation using the sum of years digits method. The sum of the years’ digits approach to depreciation is an accelerated technique since it results in higher depreciation values in the early years of the asset’s life relative to the straight line method. This technique is based on the assumption an asset provides greater value when it is newer.

Similar to the double declining balance method, sum of years depreciation aims to depreciate a company’s assets at an accelerated rate. Companies may choose the SYD method as the practice will result in a larger depreciation tax shield in the first few years of the asset’s life. The sum-of-the-years’-digits depreciation (SYD depreciation) is one method for calculating accelerated depreciation. However, the total amount of depreciation over an asset’s useful life should be the same regardless of which depreciation method is used. In other words, the difference is in the timing of when the same total amount of depreciation will be reported. On the contrary, in the later stage of the business, the business gets bigger, and the tax liability increases.

Straight Line Depreciation Method

Therefore, in this case, the depreciation is calculated by taking the No. of years of the remaining life of the asset dividing by the Total of all digits of life of the asset. To illustrate SYD depreciation, assume that a service business purchases equipment at a cost of $160,000. This asset is expected to have a useful life of 5 years at which time it will be sold for $10,000. This means that the total amount of depreciation will be $150,000 spread over the equipment’s useful life of 5 years. The useful life is how long you expect the asset will be useable before it is fully depreciated.

Remember that the total amount of depreciation during this asset’s useful life should be $150,000. Finance Strategists is a leading financial literacy non-profit organization priding itself on providing accurate and reliable financial information to millions of readers each year. At Finance Strategists, we partner with financial experts to ensure the accuracy of our financial content.

Partial-year depreciation also can be calculated using the sum-of-the-years’ digits method. As with the double-declining-balance method, the sum-of-the-years’ digits method allocates more depreciation in the early years and less in later years. The formula to calculate depreciation expense using sum-of-the-years’ digits is shown below. The advantages and disadvantages of this method are more or less the same as the declining balance method. Depreciation is calculated under sum-of-the-years’ digits by adding up the number of years in an asset’s useful economic life. Once a company decides on a depreciation method it typically has to stick with that depreciation method going forward for that particular asset.

In the first year, the rate is a fraction that has a numerator of 5, the number of years remaining at the beginning of the year. Note that the asset’s residual value is subtracted from its acquisition cost to determine its depreciable base. The method is more appropriate than the more commonly-used straight-line depreciation if an asset depreciates more quickly or has greater production ca­pacity in its earlier years than it does as it ages. The total amount of depreciation is identical no matter which depreciation method is used – the choice of depreciation method only alters the timing of depreciation recognition. Sum-of-the-Years’ Digits (SYD) method allows depreciation to be recorded based on a reversed scale of the total of digits for the years of useful life.

The sum of year digits method of depreciation is very popular among students from a finance background. The Sum of year digits depreciation method is very effective and relevant because taking higher depreciation in the earlier years is logical. Some assets are considered less productive as time passes; therefore, every year, it is depreciated by the sum of the year’s digits method. In this case, the total is calculated of all the digits of the life of the asset and then the no of years of reaming life of the asset.