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
|AMOUNT OF DEPRECIATION||BOOK VALUE|
***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
- 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 .
- This method reflects the difference in usage of different assets from one period to the other more accurately as compared to other methods.
- 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.