Sum of Years Digit Method of Depreciation

Sum of Years Depreciation (SYD) is a popular method of accelerated depreciation. Accelerated depreciation is any method which allows more deduction in the earlier years of the asset & gradually decreases in later years. This method  is based on the assumption that the productivity of the asset decreases with the passage of time.

Sum of Years Digit method is more suitable for those assets which may become obsolete very soon due to technological advancements, for example:- computers, Automobiles etc.

HOW THIS METHOD WORKS ?

This method takes the asset’s expected life and adds together the digits for each year; so if the asset was expected to last for five years, the sum of the years’ digits would be obtained by adding: 5 + 4 + 3 + 2 + 1 to get a total of 15. Each digit is then divided by this sum to determine the percentage by which the asset should be depreciated each year, starting with the highest number in year 1.

FORMULA FOR SUM OF YEARS DIGIT METHOD

The following formula is used to calculate depreciation under this method :-

 

Depreciation expense =
(Remaining useful life of the asset)/(Sum of the years digit) X Depreciable cost

 

Example of sum of years digit method of Depreciation

Let us understand this method with the help of an example –

Purchase price of asset = Rs 1,60,000

Useful life of the asset = 5 years

Salvage Value = Rs 10,000

This means that the total amount of Rs 1,50,000 will be spread over its useful life of 5 years.

Here, the sum of the years digits will be = 1 + 2 + 3 + 4 + 5= 15

YEAR DEPRECIATION

BASE

REMAINING

LIFE

DEPRECIATION

FRACTION

AMOUNT OF DEPRECIATION BOOK VALUE
1 1,50,000 5 5/15 50,000 1,00,000
2 1,50,000 4 4/15 40,000 60,000
3 1,50,000 3 3/15 30,000 30,000
4 1,50,000 2 2/15 20,000 10,000
5 1,50,000 1 1/15 10,000
        Rs 1,50,000  

 

***Amount of depreciation is calculated as – 1,50,000 X 5/15 = Rs 50,000 & so on.

As the remaining life of the machine decreases, the depreciation expense also decreases.

ADVANTAGES OF SYD METHOD

  1. This method provides tax benefits since more depreciation expense is charged in initial years which means the company will have lower reportable net income, thus decreasing the tax expense .
  2. This method reflects the difference in usage of different assets from one period to the other more accurately as compared to other methods.
  3. This method better matches costs to revenues because it takes more depreciation in the early years of an assets’ useful life compared to the straight line depreciation method.

 

Thus, the sum of years digits method is an accelerated depreciation method that can be used to depreciate the value of the asset over the useful life of the asset.

Accounting & Finance for Banking

Principles & Practices of Banking Module E Pdf

Free
Module E PPB ePDFs available in our android app. Get them all at https://iibf.info/app

Accounting and Finance for Banking Module A Pdf

Free
Accounting and finance for bankers all ePDFs are available in our an app. Get them all at https://iibf.info/app

Accounting and Finance for Banking Module A Pdf

Free
Accounting and finance for bankers all ePDFs are available in our an app. Get them all at https://iibf.info/app

Leave a reply

Please enter your comment!
Please enter your name here

Popular

Free Live Classes

spot_img

More from author

All about KYC/AML Exam by IIBF

All about KYC/AML Exam by IIBF The KYC/AML is a professional certification exam in Anti Money Laundering and Know your customer conducted by the Indian...

CCP- Certified Credit Professional Course by IIBF

IIBF CCP (Certified Credit Professional) exam is an All-India Exam directed by the Indian Institute of Banking and Finance (IIBF) to select competent candidates...

What is Digital Banking in Detail

Digital Banking is the automation of traditional banking services. It is defined as banking done through the digital platform, doing away with all the...

Digital Banking Course By IIBF

Digital Banking Course By IIBF Certificate course in Digital Banking is conducted by IIBF to provide practicing bankers a sound foundation in the digital banking...