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Assests are more productive in their early years of life and as the their life increases their productivity decreases so the assest should be depreciated more in their early years and as their useful life decreases the depreciation should also decrease.
formula of Sum of the Years Digits method is following
Depreciable Base x Remaining Useful life / Sum of the Year's Digits
n the above formula, depreciable base is the difference between cost and salvage value of the asset and sum of the years' digits is the sum of the series:
1,2,3, ... , n ; where n is the useful life of the asset in years.
it can also be calculated more easily by using following formula
Sum of the years Digits = n(n+1)/2
Example
Cost $ 45,000
Salvage Value $5,000
Useful Life in Years 4
Solution
Sum of the Years' Digits =1 +2 +3 +4 =4(4 +1) ÷2 =10
Depreciable Base = $45,000 − $5,000 = $40,000
Year DeprecableBase Depreciation Factor Depreciation Expense Accumulated Deprcatin
1 $40,000 4/10 4/10 ×40,000 =16,000 $16,000
2 $40,000 3/10 3/10 ×40,000 =12,000 $28,000
3 $40,000 2/10 2/10 ×40,000 =8,000 $36,000
4 $40,000 1/10 1/10 ×40,000 =4,000 $40,000
Sum of the Years' Digits Depreciation “SYD”
The sum of the years' digits method is used to accelerate the recognition of depreciation, so that most of the depreciation is recognized in the first few years of the useful life of a fixed asset.
If an asset depreciates more quickly or has greater production capacity in the earlier years than it does as it ages
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.
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.
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.
Use the following formula to calculate it:
Applicable percentage =
Number of years of estimated liferemaining at the beginning of the year
SYD
SYD =
n(n +1)
where n = estimated useful life
For Example if we have asset with value150,000 USD and useful life5 years
1st year 5 =5/15 =33.33% =50,000
2nd year 4 =4/15 =26.67% =40,000
3rd year 3 =3/15 =20.00% =30,000
4th year 2 =2/15 =13.33% =20,000
5th year 1 =1/15 =6.67% =10,000
Total 15 =100% =150,000
