Sum of the years' digits depreciation definition
/What is 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.
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.
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Disadvantages of Sum of the Years’ Digits Depreciation
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. It is also more complex to calculate than straight-line depreciation, which can lead to errors in the calculation.
Formula for the Sum of the Years’ Digits Depreciation
Use the following formula to calculate the sum of the years’ digits depreciation for a fixed asset:
The following table contains examples of the sum of the years’ digits noted in the denominator of the preceding formula.
Example of the Sum of the Years’ Digits Depreciation
Pensive Corporation buys a Procrastinator Elite machine for $100,000. The machine has no estimated salvage value, and a useful life of five years. Pensive calculates the annual sum of the years’ digits depreciation for this machine as:
