How to Calculate Sum of the Years Digits Depreciation

This is a method that allocates higher depreciation expense in the initial years of asset use. Depreciation is a fundamental concept in accounting, allowing businesses to allocate the cost of tangible assets over their useful lives. Among various methods, the Sum of the Years Digits (SYD) approach offers an accelerated depreciation technique that can be beneficial for companies aiming to front-load expenses.

Under accelerated depreciation methods, like the SYD method, the percentage of the total depreciation expense is weighted more toward the start of the fixed asset’s useful life. Where an entity has a policy of calculating depreciation on full years basis, sum of the years’ digits depreciation can be calculated as above. Sum of the years’ digits depreciation method, like reducing balance method, is a type of accelerated depreciation technique that allocates higher depreciation expense in the earlier years of an asset’s useful life. Like declining balance method, sum of years’ digits method attempts to charge a higher depreciation expense in early years of the useful life of the asset and a lower expense in later years. This is because the assets are generally more productive in early years and less productive in later years of their 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. Changing would require a revision of all previously submitted financial statements. In this method, the cost of an asset’s residual value is subtracted from the original cost of acquisition. The answer is the periodic depreciation that will be deducted from book value in every financial year. Notice that as the remaining life of the machine decreases, the depreciation expense also decreases.

• Sum of the Years’ Digits Method involves finding the sum of all digits between zero and the number of years in the asset’s useful life.
• Depreciation is carried out for tangible assets which are the physical assets.
• It records a larger depreciation in the earlier years of the asset’s useful life.
• 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.
• The following example shows how you can work your way through each of the above steps to calculate depreciation using the sum of the years’ digits method.

Trial Balance

For the past 52 years, Harold Averkamp (CPA, MBA) hasworked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. For the past 52 years, Harold Averkamp (CPA, MBA) has worked difference between internal audit and external audit with comparison chart as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. Depreciation charges for the first two years of the asset are $45,000 and $30,000 respectively (refer the solution of the example above in case of confusion). At the end of its useful life, the components are expected to have a residual value of $5 million (i.e. scrap value), which reflects the sale proceeds the manufacturer could hypothetically earn from selling those used components.

What Types Of Assets Are Depreciable?

• Plant, machinery, furniture, office equipment, factory, buildings, etc., are common examples of the tangible assets owned by any business entity.
• For calculating depreciation for the asset’s first year that ends on 30 September 2021 (Year 1), we will count the remaining useful life of 4 years.
• Companies must disclose their depreciation methods and assumptions in the notes to financial statements, offering insight into their accounting policies.
• The Internal Revenue Code permits accelerated depreciation methods, provided they are consistently applied.
• In the first year, the asset value subject to depreciation would be expensed 5/15 in value (33.33%).
• To calculate how much depreciation needs to be charged to each accounting period, we need to see the depreciation expense of each year of the asset (Step 4) that overlaps each accounting period.

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. For the Years 3 and 4, the remaining useful life will be 2 and 1 respectively.

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Units of Production Depreciation Method

For example, an asset with a five-year useful life would have a sum of 1 + 2 + 3 + 4 + 5, equaling 15. This sum is the denominator in the depreciation formula, determining the fraction of the asset’s depreciable cost allocated annually. Assign the highest digit to the first year, the next highest to the second year, and so on, creating a front-loaded depreciation schedule. The process begins by collecting data about the asset, including its initial cost, estimated useful life, and salvage value. The initial cost includes all acquisition expenses, such as the purchase price, delivery fees, and installation costs. Useful life reflects the period the asset is expected to generate economic benefits, based on management estimates or historical data.

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Notice that the depreciation is highest in the first year and is declining each year which means that the sum of the years digits depreciation is an accelerated depreciation method. In addition the total depreciation is 8,000 which is the same as the cost less the salvage value of the asset. The sum of the years digits depreciation method (SYD depreciation) is used to calculate the annual depreciation expense of a fixed asset. Companies typically use accelerated depreciation to minimize their taxable income because it allows for greater depreciation expense deductions in the earlier years of the equipment or asset’s life. Accelerated depreciation methods could also be seen as more accurate, as they assume that an asset loses a majority of its value in the first few years of its use. Sum-of-the-years’ digits is a method that uses an arbitrary arithmetic system to derive the annual depreciation charges.

For example, if the fixed asset has 5 years of useful life, the remaining useful life on the first-year calculation of depreciation is 5 while the last year or fifth year will be 1. Sum of the years’ digits depreciation uses the assumption that the benefits that the company receives from the fixed asset will go down through the passage of time. It is similar to the declining balance depreciation in which the depreciation expense in the sum of the years’ digits method will go down as time passes making the last depreciation expense the smallest. The sum-of-the-years’-digits depreciation (SYD depreciation) is one hedge accounting may be more beneficial after fasbs changes 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.

Under the sum of the years’ digits method (SYD), the depreciation expense recognized in each period is the depreciation factor multiplied by the depreciable basis. The benefit of using an asset will decline as the asset gets older, meaning an asset provides greater service value in earlier years. 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. Accelerated depreciation uses decreasing charge methods, including the sum-of-the-years’ digits (SYD), providing higher depreciation costs in earlier years and lower depreciation charges in later periods.

Advantages and Disadvantages of Sum-of-the-Years’ Digits Method of Depreciation

The table below summarizes the breakdown of the depreciation expenses for each year. Beth purchased a display shelf for her bakery costing $10,000 on 1 January 2020. The has a useful life of 4 years after which it is expected to have no residual value. To find the delivery truck’s remaining useful life, we need to count it from the start of each year rather than the end. This may seem strange to you at first, but you will get the hang of it soon with practice.

While all the methods of depreciation would lead to the same result, the only variation is the time taken for depreciation recognition. The straight-line method may take much longer to calculate the depreciation expense. The method facilitates the calculation when the asset performance is at its highest.