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Companies acquire physical resources and tangible assets to enhance their business value. Examples include vehicles, machinery, cash, inventory, equipment, and land. Companies must gauge this degradation and compute asset values as it influences their operations. This assessment process is termed “depreciation.” This article delves into the specifics of the “Sum of the Year’s Digits” depreciation method.

As with the previous example, assume that our company has an asset with an initial cost of $50,000, a salvage value of $10,000, and a useful life of five years and 3,000 units. This time, we are going to create a depreciation schedule for the asset using the two types of depreciation shown in the screenshot below. To follow along in Excel, access the spreadsheet here and go to the second tab.

- The total amount of depreciation taken over the entire life of the asset should equal the depreciable cost (cost minus salvage value).
- Per refers to the number of period for which we want to determine depreciation expense.
- 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.
- Next, calculate the applicable percentage of depreciation for each year of the asset’s life.

Each number is then divided by this sum to derive the percentage depreciation for each year. This approach calculates the annual depreciation rate by considering the remaining years of useful life divided by the sum of the remaining years in each subsequent year. This method calculates depreciation based on the asset’s production output rather than time-based usage.

Use this calculator to calculate an accelerated depreciation using the sum of years digits method. For calculating depreciation for the asset’s first year that ends on 30 September 2021 (Year 1), we will count the remaining useful life of 4 years. For the next year of the asset’s life that ends on 30 September 2022 (Year 2), the remaining useful life will be counted as 3 years. For Years 3 and 4 of the asset, the remaining useful life will be counted as 2 and 1, respectively. Using the depreciation formula, we can calculate the amount of depreciation for each year of the asset’s life using the values calculated in Steps 1 to 3.

Under this method, the percentage of depreciation rate for each year is calculated by the years remaining in the useful life divided by the sum of remaining life every year throughout the asset’s life. how long should i keep records SYD is an Excel function that calculates the depreciation expense under the sum of the years digits method. While all depreciation methods yield the same result, the timing of recognition varies.

Depending on the chosen cost apportionment or depreciation rate, depreciation charges can be variable, straight-lined, or accelerated over the useful life of an asset. To calculate depreciation using the SYD formula, we need to input the remaining useful life of the asset at the start of the period (1 July 2021) which is 5 years. 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. For the Years 3 and 4, the remaining useful life will be 2 and 1 respectively.

In the example above, your straight-line depreciation expense would have been $20,000 each year—$100,000 x 1 /5. Additionally, in later years, your depreciation deduction for this asset will be lower under the sum of the years’ digit method. We need to deduct the salvage value ($2000) from the initial cost ($12000) to calculate the delivery truck’s depreciation base.

This would continue until the asset was fully depreciated, having been completely expensed on the income statement and fully depreciated on the balance sheet. As an asset gets older, repair and maintenance costs are to rise as the asset needs repairs more often; again, consider an automobile as an example. The benefit of using an asset will decline as the asset gets older, meaning an asset provides greater service value in earlier years.

The declining balance method is a type of accelerated depreciation used to write off depreciation costs earlier in an asset’s life and to minimize tax exposure. With this method, fixed assets depreciate more so early in life rather than evenly over their entire estimated useful life. An accelerated depreciation method, the double-declining method calculates depreciation twice as fast as that in the declining balance method. It records a larger depreciation in the earlier years of the asset’s useful life. Sum of Years Depreciation (SYD) is a method of accelerated depreciation.

If we assume the equipment goes obsolete in three years instead of four, then the SYD method has already depreciated a major chunk of the total value. The first thing to notice is how the depreciation expense for Year 1 ($290,000) is significantly higher than the depreciation expense for Year 4 ($72,500). This indicates the usefulness of SYD, as 70% of the total depreciation is accounted for in the first two years. Additionally, ABC had to pay $50,000 in shipping costs to transport the order on time. Deskera Books is an online accounting software that your business can use to automate the process of journal entry creation and save time. The double-entry record will be auto-populated for each sale and purchase business transaction in debit and credit terms.

To start, a company must know an asset’s cost, useful life, and salvage value. Then, it can calculate depreciation using a method suited to its accounting needs, asset type, asset lifespan, or the number of units produced. The sum-of-the-years’-digits method (SYD) accelerates depreciation as well but less aggressively than the declining balance method. Annual depreciation is derived using the total of the number of years of the asset’s useful life. The SYD depreciation equation is more appropriate than the straight-line calculation if an asset loses value more quickly, or has a greater production capacity, during its earlier years. Let’s go through an example using the two methods of depreciation described so far.

Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets. Accountingo.org aims to provide the best accounting and finance education for students, professionals, teachers, and business owners. Beth purchased a display shelf for her bakery costing $10,000 on 1 January 2020. The has a useful life of 4 years after which it is expected to have no residual value.