We will use the same value to calculate the depreciation expense of the future accounting periods. This function helps in calculating the depreciation of an asset, specifically the sum-of-years’ digits depreciation for a specified period in the lifetime of an asset. Calculate the sum of years’ digits depreciation for each year of the fixed asset above.

- 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.
- In this first method, we will apply the SYD function for the calculation sum of years’ digits depreciation.
- This depreciation schedule should have the same depreciation expense values as in the table above.

In the third year, the asset value subject to depreciation would be expensed 3/15 (20%). This would continue until the asset was fully depreciated, having been completely expensed on the income statement and fully depreciated on the balance sheet. 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. The formula to calculate depreciation expense using sum-of-the-years’ digits is shown below. You can access the two accompanying videos here and here and a workbook with examples of using the various depreciation methods.

## SYD Function

Similar to the double declining balance method, sum of years depreciation aims to depreciate a company’s assets at an accelerated rate. Companies may choose the SYD method as the practice will result in a larger depreciation tax shield in the first few years of the asset’s life. I hope you will find the 2 easy methods useful to calculate the sum of years’ digits depreciation with formulas in Excel. The SYD depreciation schedules using the formula and Excel function showcased how the depreciation expense is distributed over the equipment’s useful life. It enhances how one views the utility of fixed assets whilst resulting in tax shields for tech company ABC. Regardless of these conceptual arguments, a company’s managers can choose between these accelerated depreciation methods for any depreciable asset.

This is similar to the changes undergone by the depreciation factor when using the SYD formula. Without this accelerated calculation offered by the sum of the years’ method, the earnings may get distorted. In the later years, when depreciation expenses may not be able to offset the cost of the maintenance and repair. Use this calculator to calculate an accelerated depreciation using the sum of years digits method.

- Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
- 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.
- Use this calculator to calculate an accelerated depreciation using the sum of years digits method.
- Companies purchase physical assets, also known as tangible assets as they add value to their business.
- High-tech products are examples of assets in which the decline of benefits is likely to follow such a pattern.
- 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).

Many companies calculate their depreciation expense using an accounting method called accelerated depreciation. In this depreciation scenario, an asset, such as a piece of equipment, has its book value reduced on the balance sheet at a faster rate than a traditional straight-line depreciation method. Companies use a few different methods for achieving this, such as the Sum of Years’ Digits (SYD) method. This method or any other accelerated depreciation method artificially reduces the reported profit of a business over the near term. It leads to low profits immediately, which are followed by higher profits when the period ends.

The units of production method assigns an equal expense rate to each unit produced. It’s most useful where an asset’s value lies in the number of units it produces or in how much it’s used, rather than in its lifespan. The formula determines the expense for the accounting period multiplied by the number of units produced. The four depreciation methods include straight-line, declining balance, sum-of-the-years’ digits, and units of production. Depreciation accounts for decreases in the value of a company’s assets over time. In the United States, accountants must adhere to generally accepted accounting principles (GAAP) in calculating and reporting depreciation on financial statements.

## Fixed assets suitable for sum of years digits depreciation

Depreciation expenses are recorded for accounting purposes and its calculation is, therefore, important to a business. Companies purchase physical assets, also known as tangible assets as they add value to their business. The monthly accounting close process for a nonprofit organization involves a series of steps the importance of consolidated financial statements to ensure accurate and up-to-date financial records. Sum of Years Digit is best suited for assets that may become obsolete very soon due to technological advancements, such as computers, automobiles, etc. This formula is best for production-focused businesses with asset output that fluctuates due to demand.

## Double Declining Balance Method

This method often is used if an asset is expected to lose greater value or have greater utility in earlier years. Some companies may use the double-declining balance equation for more aggressive depreciation and early expense management. There are multiple steps involved in calculating the sum of the years’ digits. For the calculation, you will need to know the total useful life of the asset.

## Double-Declining Balance Depreciation Method

The remaining useful life is the only value in the SYD depreciation formula that varies from one accounting period to another. Sum of the Years’ Digits (SYD) is a type of accelerated depreciation method that has a unique way of calculating the depreciation expense. The sum of years’ digits is one of the methods to calculate the depreciation of an asset.

## Sum of the years’ digits depreciation definition

In the third full year of the asset’s life, the depreciation will be $30,000 (3/15 of $150,000). The fourth year depreciation will be $20,000 (2/15 of $150,000), and the fifth year will be $10,000 (1/15 of $150,000). Remember that the total amount of depreciation during this asset’s useful life should be $150,000. Another key component to notice is that the depreciation amount for year 1 is always multiplied by the depreciation factor for each year. 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.

## What are the disadvantages of the sum of years digit method?

This would defer tax payments to later years with higher net income due to lesser depreciation recognition. The asset has 3 years useful life at the end of which it is not expected to have any salvage value. Our example assumes ABC technologies that purchased computers for $4,000,000. Considering the useful life of the computers to be 5 years and a salvage value of $100,000.