# Sum of Years Digits Method of Depreciation

Article byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

## What is the Sum of Years Digits Depreciation Method?

Sum of years Digits Methods or the sum of year depreciation method is an accelerated depreciation method whereby the method declines the asset’s value at an accelerated rate. Most of the depreciation of an asset is recognized in the first few years of its useful life. Therefore greater deductions are allowed in the starting life of the assets than in subsequent years, mainly in the case of those assets which are heavily used when they are new.

Although, the amount of depreciation remains the same whether the Company uses the straight-line depreciation method, double declining balance method, or the sum of year digits method. It is just that the amount of timing of the depreciation differs in all three approaches.

• The sum of the year’s digits method causes the Company’s net income variability. The assets are depreciated at a higher rate in the early years, and thus, the net income is lower in the early life of the asset. But as the useful life of the asset increases, the reported net income increases.
• However, using this method can indirectly impact the . Since the depreciation amount is higher in the initial years, the reported net income is lower; hence, the tax implication is lower.

### Steps to Sum of Years Digits Method

Below are the steps to the sum of years digits method –

1. First, calculate the depreciable amount, which is equal to the asset’s total cost of acquisition minus the salvage value. The acquisition cost is the CAPEX the company had made to acquire the asset. Depreciable amount = Total acquisition cost – Salvage Amount.

2. Calculate the Sum of Useful Years of the Asset.

3. The depreciation amount is multiplied by a depreciation factor each year. The depreciation factor is the asset’s useful life divided by the sum of the good years of the asset.

4. Thus, the Sum of years depreciation = Number of useful years/sum of useful years * (Depreciable amount)

5. Let us say the useful life of an asset is 3. Then, the sum of useful years = 3 + 2 + 1 = 6. Thus, the factors for each year will be 3/6, 2/6, and 1/6, respectively, for the 1st, 2nd, and 3rd

### Sum of Years Digits Method Example

Let us understand the concept with an example below:

A Computer Company has purchased some computers worth \$ 5,000,000. It cost them \$ 200,000 to transport the Computer to their location. The Company considers that the useful life of Computers is five years and they can expire the computers at a value of 100,000.

Now, considering the above example, let us create a depreciation schedule for the asset using the Sum of year depreciation method.

#### Step 1 – Calculate the Depreciable Amount

• Total Acquisition Cost = 5000000 + 200000 = 5200000
• Salvage Value = 100000
• Useful life of Computers = 5 years
• Depreciation Amount = Acquisition Cost – Salvage Value = 5200000 – 100000 = 5,100,000

#### Step 2 – Calculate the Sum of Useful Life

Sum of useful life = 5 + 4 + 3 + 2 +  1 = 15

#### Step 3 – Calculate Depreciation Factors

The depreciation factors are as follows

• Year 1 – 5/15
• Year 2 – 4/15
• Year 3 – 3/15
• Year 4 – 2/15
• Year 5 – 1/15

#### Step 4 – Calculate Depreciation for each year.

The depreciation expense of first year = \$5,000,000 x 5/15 = \$1,700,000

The amount left to be depreciated is calculated as \$5,100,000 – \$1,700,000 = \$1,360,000

Likewise, we can calculate the depreciation expense for years 2, 3, and 4.

Year 5 depreciation is not calculated using the depreciation factor. As it was the well last year, we depreciate the full amount left for depreciation. In this case, it is \$340,000

As seen from the above depreciation schedule of the year depreciation method, the depreciation expense is highest in the early years. It keeps decreasing as the asset life increases, and it becomes obsolete.