The sum-of-years'-digit method is an accelerated depreciation method where higher depreciation charges are taken in the early years of an asset's life. Each year of the asset's useful life is assigned a digit, from 1 for the first year to n for the nth year. These digits are summed to calculate a depreciation rate for each year. The asset's depreciable base is multiplied by the yearly rate to calculate annual depreciation expenses over the asset's life. Two examples demonstrate calculating depreciation using this method.
2. WHAT IS SUM OFYEARS’ DIGIT
METHOD?
A method of accelerated depreciation (higher charges are taken at the
beginning of a fixed asset's useful life).
Give each year of the asset's life a digit (1 for the first year, 2 for the second,
etc.) and add the digits together.
In the case of five years, the sum will equal 15. In the first year, a charge will
be taken equal to 5/15 of the total cost of the asset (minus its salvage value).
In the second year, a charge equal to 4/15 will be taken. In the third year, 3/15,
etc
3. METHOD OF CALCULATING
■ Depreciable base = the difference between cost and salvage value of the
asset
■ Sum of the years’ digits =
𝑛(𝑛+1)
2
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝐵𝑎𝑠𝑒 ×
𝑅𝑒𝑚𝑎𝑖𝑛𝑖𝑛𝑔 𝑈𝑠𝑒𝑓𝑢𝑙 𝐿𝑖𝑓𝑒
𝑆𝑢𝑚 𝑜𝑓 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟𝑠′ 𝑑𝑖𝑔𝑖𝑡𝑠
4. EXAMPLE OF SUM OFTHEYEARS’ DIGIT
DEPRECIATION METHOD
ABC Company purchases a machine for RM100000. It has an
estimated salvage value of RM 10000 and a useful life of five
years. Calculate the depreciation over the useful life of the asset
using the sum of the years’ digit method.
5. ■ Step 1: Sum of the years’ digit =
5(5+1)
2
= 15
■ Step 2: Depreciation amount = RM 100000 – RM 10000
= RM 90000
■ Step 3: Un-depreciated useful life (years)
Year 1 Year 2 Year 3 Year 4 Year 5
5 4 3 2 1
6. ■ Step 4:
Depreciation expense of year 1 =
5
15
x RM 90000
= RM 30000
Depreciation expense of year 2 =
4
15
x RM 90000
= RM 24000
Depreciation expense of year 3 =
3
15
x RM 90000
= RM 18000
Depreciation expense of year 4 =
2
15
x RM 90000
= RM 12000
Depreciation expense of year 5 =
1
15
x RM 90000
= RM 6000
7. EXAMPLE 2
PRO Company purchases a machine for $45000. It has an
estimated salvage value of $5000 and a useful life of five years.
Calculate the depreciation over the useful life of the asset using
the sum of the years’ digit method.
Cost $45,000
SalvageValue $5,000
Useful Life inYears 4
Asset is Depreciated Yearly
Cost $45,000
SalvageValue $5,000
Useful Life inYears 4
Asset is Depreciated Yearly
9. COMPARISON
Method Straight Line Declining Balance Sum of years digits
Descriptio
n
• Simplest
• most commonly used
• less profitable
• accelerated depreciation method
• more accurately
• accelerated depreciation method
• better matches costs to revenues
• more accurately
• never reach zero using this method
• progressively falling rate
Formula
• Annual Depreciation
expense = (Asset cost –
Residual Value) / Useful
life of the asset
• Annual Depreciation = Initial cost *
percentage rate from expected
useful life and factor
• Depreciation = Initial cost *
remaining useful life (current period)
/ total of remaining useful life (over
entire useful life)
Drawing