From a conceptual perspective, these methods are most suited for assets that give up a greater portion of their benefits in their early years. Partial-year depreciation also can be calculated using the sum-of-the-years’ digits method. Depreciation is calculated under sum-of-the-years’ digits by adding up the number of years in an asset’s useful economic life. 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.

After all, the calculation formula of the sum of the years’ digits depreciation is different from that of the declining balance depreciation. Depreciation is a method of asset cost allocation that apportions an asset’s cost statement of account what is a statement of account to expenses for each period expected to benefit from using the asset. Depending on the chosen cost apportionment or depreciation rate, depreciation charges can be variable, straight-lined, or accelerated over the useful life of an asset. We only need to calculate this value one time in an asset’s life when we estimate its depreciation for the first time.

Sum of the Years Digits Method

It starts with the value n in the first year and decreases by 1 each year until it equals 1 in the final year of the asset’s estimated service life. This results in a reasonably constant expense related to the asset because depreciation expense declines as repair expense increases. Accelerated depreciation is also appropriate for assets that have higher repair expenses in later years.

Which of these is most important for your financial advisor to have?

1. To find the delivery truck’s remaining useful life, we need to count it from the start of each year rather than the end.
2. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.
3. The implicit assumption of the sum of the years’ digits depreciation method is that the fixed asset (PP&E) is more productive and provides more near-term value in the periods immediately post-purchase.
4. 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.

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. Therefore, the depreciable basis amounts to $40 million, i.e. the cost basis of the fixed asset purchase minus the salvage value. The sum of the years’ digits can be calculated using the formula “(N + 1) ÷ 2”, rather than by manually adding each figure. We need to deduct the salvage value ($2000) from the initial cost ($12000) to calculate the delivery truck’s depreciation base. For example, if an asset costs $1000 and has a salvage value of $200, its depreciation base is $800. For example, if an asset has a useful life of 5 years, the sum of its years’ digits will equal 15 (1 + 2 + 3 + 4 + 5).

11 Financial’s website is limited to the dissemination of general information pertaining to its advisory services, together with access to additional investment-related information, publications, and links. The exception is that the calculations needed in sum-of-the-years’ digits are slightly more complex. Note how the depreciation factor works backward, starting with the largest value (Year 4) before incrementally dropping in each period thereafter. 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.

Fixed assets suitable for sum of years digits depreciation

For Years 3 and 4 of the asset, the remaining useful life will be counted as 2 and 1, respectively. 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. Sum of the Years’ Digits (SYD) is a type of accelerated depreciation method that has a unique way of calculating the depreciation expense.

This has the effect of making profits higher than how to find make and model of a car they would be if they were calculated using the more traditional approach of straight-line Depreciation. This approach requires straight-line Depreciation rates and an asset’s useful life (which is the time period over which it will be used/depreciated). Finally, this method requires management to determine the appropriate Depreciation rate.

We may earn a commission when you click on a link or make a purchase through the links on our site. 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.

However, where the asset is received during an accounting period, and the business charges partial-year depreciation in the first year, we will proceed to Step 5 to allocate the depreciation expense over the relevant accounting periods. Use this calculator to calculate an accelerated depreciation using the sum of years digits method. To calculate depreciation using the SYD formula, we need to input the remaining useful life of the asset at the start of the period (1 July 2021) which is 5 years. 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. Therefore, the depreciation expense for the second accounting period is equal to 9/12 ✕ $4000 plus 3/12 ✕ $3000.

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. 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. The company can calculate sum of the years’ digits depreciation with the formula of using the remaining useful life of fixed asset to divide by the sum of years’ digits and then multiply the result by the depreciable cost of the fixed asset. 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.

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. According to the sum of years’ digits method, the Depreciation expense is greater in earlier years (due to higher depreciable cost) and decreases over time until it becomes zero at the end of the asset’s useful life. The straight-line Depreciation expense is the same each year, because there are no residual values involved. Try to apply your knowledge to calculate depreciation under the sum of digits method for an asset acquired mid-way during an accounting period in the multiple-choice question below. 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. 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.

Sum of the years’ digits depreciation method involves calculating depreciation based on the sum of the number of years in an asset’s useful life. Like the sum of the years’ digits calculated in Step 1, the depreciation base does not change over the asset’s life and therefore only needs to be calculated once. On the other hand, the fixed asset that provides stable benefits from year to year during its useful life, e.g. building, is not suitable for the sum of years digits depreciation. The depreciable basis is calculated by subtracting the salvage value assumption from the purchase cost (Capex), which refers to the residual value of the fixed asset at the end of the fixed asset’s useful life. 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.

Sum of the years’ digits depreciation is the type of depreciation method that allocates the higher cost of the fixed assets in the early year and reduces the depreciation expense in later years as time passes. The company can calculate sum of the years’ digits depreciation after determining the expected useful life of the fixed asset and the depreciable cost to use as a basis of calculation. The remaining useful life of the fixed asset is determined separately in each year of depreciation in the sum of years’ digits depreciation methods. 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.

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 years in year 1, 2 years in year 2, and 1 year in year 3. Accelerated depreciation allows for the likelihood of assets to decline over time, and also to require higher repair and maintenance costs in later years than when first purchased. The formula to calculate depreciation expense using sum-of-the-years’ digits is shown below.