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## Formula for calculating depreciation

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. 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 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. As mentioned, using the sum of years digits depreciation of the fixed assets will make the depreciation expense that the company charged to the income statement higher in the early year, and such expense will go down as time passes.

Businesses must account for depreciation and there are a few ways to do it, some better suited than others depending on the specific asset. 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 what is trade discount journal entry examples calculator calculating depreciation, can easily be calculated in Excel using the “SYD” function. Depreciable cost in sum of years digits depreciation can be calculated with the formula of fixed asset cost deducting its salvage value. Calculate depreciation over the useful life of the asset using the sum of the years’ digits method.

High-tech products are examples of assets in which the decline of benefits is likely to follow such a pattern. Note that the asset’s residual value is subtracted from its acquisition cost to determine its depreciable base. A financial professional will offer guidance based on the information provided and offer a no-obligation call to better understand your situation.

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. If an asset is acquired on the first day of an accounting period or if it is the accounting policy to charge a full year’s depreciation in the year the asset is received, this will be the last step of the SYD depreciation calculation. The simplest and most common method of depreciation is the straight-line basis method of depreciation. Once a company decides on a depreciation method it typically has to stick with that depreciation method going forward for that particular asset. Depreciation determined in this way constitutes the annual depreciation expense, which is applied to the cost of acquisition or construction of the asset to be depreciated rather than the asset’s written-down value. For illustrative purchases, we’ll assume there were no capital expenditures (Capex), the purchase of fixed assets, in each period.

In this case, the company should use the sum of years digits depreciation method on the fixed assets that can produce higher productivity in the early year and such productivity will gradually drop down as time passes. For example, on January 1, the company ABC buys a machine that cost $52,000 in order to use for the day-to-day operation. Due to the nature of the machine, the company ABC decides to use the sum of years’ digits depreciation method to allocate the cost of the machine over its useful life. The sum of the years’ digits method of depreciation, or “SYD”, reduces the book value of a fixed asset (PP&E) at a front-loaded, accelerated depreciation rate. After all, the company should try to match the expense coming from the depreciation of the fixed asset with the benefits that it provides to the company.

## Free Financial Modeling Lessons

- For illustrative purchases, we’ll assume there were no capital expenditures (Capex), the purchase of fixed assets, in each period.
- A copy of 11 Financial’s current written disclosure statement discussing 11 Financial’s business operations, services, and fees is available at the SEC’s investment adviser public information website – from 11 Financial upon written request.
- 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 demonstrate how this fraction is worked out, suppose that an asset has a 5-year life.

For example, if an asset has a 5-year economic useful life, the numbers 1, 2, 3, 4 and 5 are added, and the resulting sum (15) becomes the denominator while the numerator is the number of remaining years of the useful economic life of the asset. To figure out the depreciation expense of each year, we first need to calculate is the sum of the years digits. Since the useful life of the truck is four years, we need add all numbers that fall between 4 and zero to find the sum. To demonstrate how this fraction is worked out, suppose that an asset has a 5-year life. 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. The following table contains examples of the sum of the years’ digits noted in the denominator of the preceding formula.

## What is your current financial priority?

Depreciation is the process of the allocation of fixed assets cost over their useful life. However, the company needs to properly allocate the cost so that the depreciation expense charged to the income statement matches the benefits that the company receives from the fixed assets. This is so that the recognition of the depreciation expense in the company’s account is properly in compliance with the matching principle of accounting. However, the depreciation expense in the sum of the years’ digits goes down in the linear line instead of the curve line like those in the declining balance method.

The economic useful life of the industrial components is merely 4 years because of the rapid “wear-and-tear” attributable to the use-case. Accountingo.org aims to provide the best accounting and finance education for students, professionals, teachers, and business owners. Someone on our team will connect you with a financial professional in our network holding the correct designation and expertise. 11 Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements.

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. For example, in the first accounting period that ends on 31 December 2020, only 3 months out of the first year of the asset overlaps. So we charge 3/12 of the first year’s depreciation expense ($4000) to the accounting period that ends on 31 December 2020. 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.

In the third full year of the asset’s life, the depreciation will be $30,000 (3/15 of $150,000). The fourth year depreciation will be $20,000 (2/15 of $150,000), and the fifth year will be $10,000 pros and cons of being a bookkeeper (1/15 of $150,000). Remember that the total amount of depreciation during this asset’s useful life should be $150,000. 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.

The denominator is the sum of the digits from 1 to n, where n is the number of years in the asset’s service life. Use of the method can have an indirect impact on cash flows, since accelerated depreciation can reduce the amount of taxable income, thereby deferring income tax payments into later periods. In the second full year of the asset’s life, the amount of depreciation will be $40,000 (4/15 of $150,000).

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. Under the SYD method, the depreciation rate percentage for each year is calculated as the number of years remaining in the asset’s life for the same year divided by the sum of the remaining asset’s life every year through the asset’s entire life. 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.

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. Calculate the sum of years’ digits depreciation for each year of the fixed asset above. 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.

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).