To calculate depreciation charges using the sum of the years' digits method, you'll need to first get the depreciable base, which is the cost of the asset. Second, you'll calculate the salvage value of the asset, which works the same for both the SYD and straight-line depreciation methods. For example, if you buy an asset for $100,000 and it can be sold for an estimated $10,000 at the end of its useful life, the balance subject to depreciation is $90,000, and the salvage value is $10,000.

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. The step-by-step process to calculate the annual depreciation expense under the sum of the years’ digits method is as follows. There are a multitude of depreciation methods – such as the straight-line method, double declining balance (DDB), and units of production method – but the sum of the years’ digits is categorized as a form of accelerated deprecation. The benefit of using an asset will decline as the asset gets older, meaning an asset provides greater service value in earlier years.

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Now, considering the above example, let us create a depreciation schedule for the asset using the Sum of year depreciation method. For illustrative purchases, we’ll assume there were no capital expenditures (Capex), the purchase of fixed assets, in each period. The sum of the years’ digits for this particular fixed asset (PP&E) comes out to 10 years. Therefore, the depreciable basis amounts to $40 million, i.e. the cost basis of the fixed asset purchase minus the salvage value. Once a company decides on a depreciation method it typically has to stick with that depreciation method going forward for that particular asset. The depreciation factor – the ratio between the remaining useful life and sum of the years’ digits – is 4/10, 3/10, 2/10, and 1/10 from Year 1 to Year 4, respectively.

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. As an asset gets older, repair and maintenance costs rise as the asset needs repairs more often; again, consider an automobile as an example. The accelerated or decreasing cost allocation for asset depreciation, such as the sum-of-the-years' digits method, better matches the cost of using an asset to the benefit the asset use provides each year over the economic life of the asset. 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.

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Hence, for an asset that has a useful life of 4 years, the un-depreciated useful life to be used in calculating depreciation shall be 4 years in the first year of depreciation, 3 years in the second year and so on. Un-depreciated useful life is equal to the number of years in the asset’s useful life that have not yet been subjected to depreciation. The simplest and most common method of depreciation is the straight-line basis method of depreciation. 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 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 sum of the years’ digits can be calculated using the formula “(N + 1) ÷ 2”, rather than by manually adding each figure. The following table contains examples of the sum of the years’ digits noted in the denominator of the preceding formula. In the PP&E roll-forward schedule, the ending PP&E balance is the purchase cost ($25 million), plus capital expenditures (Capex), less depreciation.

1. Accruing tax liabilities in accounting involves recognizing and recording taxes that a company owes but has not yet paid.
2. The same asset, using straight-line depreciation and zero salvage value, would be depreciated at $5,000 per year for five years ($25,000 ÷ 5) until the asset depreciates to zero value.
3. 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.
4. In effect, the annual depreciation expense recognized on the income statement is greater in earlier periods, causing the reduction in the book value of the fixed asset on the balance sheet to also be higher early on.
5. 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 sum of the year depreciation method aims to depreciate the asset at an accelerated rate, i.e., higher depreciation expense in the early years and lower depreciation expense in later years. It is useful for deferring tax payments, especially for assets with a lower useful life, and may quickly become obsolete. 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. The formula to calculate the sum of the years’ digits depreciation divides the remaining useful life by the sum of the years’ digits of the fixed asset (PP&E), which is then multiplied by the depreciable basis.

To calculate depreciation using this method, take the estimated life of the asset and add the years together. Sum of years Digits Methods or the sum of year depreciation method is an accelerated depreciation method whereby the method declines the asset's value at an accelerated rate. Most of the depreciation of an asset is recognized in the first few years of its useful life. Therefore greater deductions are allowed in the starting life of the assets than in subsequent years, mainly in the case of those assets which are heavily used when they are new. 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.

Repair and Maintenance Costs

It is also more complex to calculate than straight-line depreciation, which can lead to errors in the calculation. 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. Using the information from the example above, you would calculate the applicable depreciation percentage for each depreciable year. In the first year, the asset value subject to depreciation would be expensed 5/15 in value (33.33%).

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. 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. Calculate depreciation over the useful life of the asset using the sum of the years’ digits method. Many companies calculate their depreciation expense using an accounting method called accelerated depreciation. In this depreciation scenario, an asset, such as a piece of equipment, has its book value reduced on the balance sheet at a faster rate than a traditional straight-line depreciation method.

How to Calculate Declining Balance Depreciation

As seen from the above depreciation schedule of the year depreciation method, the depreciation expense is highest in the early years. Use this calculator to calculate an accelerated depreciation using the sum of years digits method. Use of the method can have an indirect impact on it's a fair cop definition and meaning cash flows, since accelerated depreciation can reduce the amount of taxable income, thereby deferring income tax payments into later periods. As with similar depreciation methods, in the last year we ignore the formula and depreciate only to the salvage value of the asset.

Under the sum of the years’ digits method, the depreciation rate is higher in the earlier periods of the fixed asset’s economic useful life relative to that in the latter periods. Where an entity has a policy of calculating depreciation on full years basis, sum of the years’ digits depreciation can be calculated as above. The sum of the years’ digits method of depreciation, or “SYD”, reduces the book value of a fixed asset (PP&E) at a accounting history front-loaded, accelerated depreciation rate. The sum of years digits method is an accelerated depreciation method that can be used to depreciate the asset's value over the useful life.

Accruing tax liabilities in accounting involves recognizing and recording taxes that a company owes but has not yet paid. The asset has 3 years useful life at the end of which it is not expected to have any salvage value. Note how the depreciation factor works backward, starting with the largest value (Year 4) before incrementally dropping in each period thereafter. The Company considers that the useful life of Computers is five years and they can expire the computers at a value of 100,000. 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.

The sum-of-the-years' digits (SYD) is an accelerated method better suited for assets that depreciate more early in their useful life since accelerated depreciation assumes higher depreciation costs in the early years. The sum-of-the-years' digits, which is an accelerated method of calculating depreciation, can easily be calculated in Excel using the "SYD" function. To illustrate SYD depreciation, assume that a service business purchases equipment at a cost of $160,000.

Next, calculate the applicable percentage of depreciation for each year of the asset's life. 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. 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. 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.