For information pertaining to the registration status of 11 Financial, please contact the state securities regulators for those states in which 11 Financial maintains a registration filing. 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. As such, most of the cost of these assets should be allocated to these same early years. In the PP&E roll-forward schedule, the ending PP&E balance is the purchase cost ($25 million), plus capital expenditures (Capex), less 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.

## Table of Contents

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.

Both the declining balance and sum-of-the-years’ digits methods are examples of accelerated depreciation. On the other hand, the sum of years’ digits can be determined by totaling the digits in every year of the fixed asset’s useful life. For example, if the fixed asset has 5 years of useful life, the sum of years’ digits can be determined to be 15 (5 + 4 + 3 + 2 + 1). The step-by-step process to calculate the annual depreciation expense under the sum of the years’ digits method is as follows. The Sum of the Years’ Digits (SYD) is a method of accelerated depreciation, wherein a greater percentage of a fixed asset is depreciated in earlier 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.

## Sum of the Years’ Digits Depreciation Calculator

- We need to count the remaining useful life from the asset’s timeline rather than the accounting periods’ perspective.
- 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.
- That is, the expense tends to be higher in early years, which makes sense if an asset gives up its benefits faster earlier on.
- Therefore, the depreciation expense for the second accounting period is equal to 9/12 ✕ $4000 plus 3/12 ✕ $3000.

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. Furthermore, management can choose straight-line depreciation for financial reporting purposes and a special form of accelerated depreciation for tax purposes. 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. This rate is a fraction, in which the numerator is the number of years remaining in the asset’s life at the beginning of the year and the denominator is the sum of the digits of the asset’s useful life. The advantages and disadvantages of this method are more or less the same as the declining balance method.

The remaining useful life is the only value in the SYD depreciation formula that varies from one accounting period to another. 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. 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.

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The sum of the years’ digits for this particular fixed asset (PP&E) comes out to 10 years. 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. An asset’s depreciation base is its initial cost, minus any salvage or residual value at the end of its useful life. 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.

## What are the disadvantages of the sum of years digit method?

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.

The asset has 3 years useful life at the end of which it is not expected to have any salvage 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. Finance Strategists has an advertising relationship with some of the companies included on this website.

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Based on the depreciation expense calculated for each year of the asset’s life in Step 4, calculate the depreciation amount that needs to be charged for each accounting period. 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. Regardless of these conceptual arguments, a company’s managers can choose between these accelerated depreciation methods for any depreciable asset.

We will use the same value to calculate the depreciation expense of the future accounting periods. Sum-of-the-years’ digits is a method that uses an arbitrary arithmetic system to derive the annual depreciation charges. 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’ loss on sale of equipment digits is categorized as a form of accelerated deprecation. 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.

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. 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 expense under this method is calculated by multiplying the depreciable cost of an asset by the fraction of its remaining useful life and the sum of its years’ digits.

We may earn a commission when you click on a link or make seo keywords for accountants 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.