Overview of Sum of the Years' Digits Depreciation
The sum of the years' digits method is used to accelerate the recognition of depreciation. Doing so means that most of the depreciation associated with an asset is recognized in the first few years of its useful life. This method is also called the SYD method.
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 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. The result is excessively low profits in the near term, followed by excessively high profits in later reporting periods.
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.
Use the following formula to calculate it:
|Applicable percentage =||Number of years of estimated life
remaining at the beginning of the year
|SYD =||n(n + 1)||where n = estimated useful life|
Example of Sum of the Years' Digits Depreciation
ABC Company purchases a machine for $100,000. It has an estimated salvage value of $10,000 and a useful life of five years. The sum of the years' digits depreciation calculation is:
|SYD =||5(5 + 1)||= 15|
This formula yields the sum of each year of the estimated useful life:
1 + 2 + 3 + 4 + 5 = 15
life at beginning of year