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Sum-of-the-Years' Digits

Sum-of-the-Years' Digits
BusinessCorporate Finance and AccountingAccounting

What Is Sum-of-the-Years' Digits?

Sum-of-the-years' digits (SYD) is an accelerated method for ascertaining an asset's depreciation. This method takes the asset's expected life and includes the digits for every year; so in the event that the asset was expected to last for quite a long time, the sum of the years' digits would got by add: 5 + 4 + 3 + 2 + 1 to get a total of 15. Every digit is then separated by this sum to decide the percentage by which the asset ought to be depreciated every year, starting with the highest number in year 1.

Grasping Sum-of-the-Years' Digits

Depreciation is a method of asset cost allocation that distributes an asset's cost to expenses for every period expected to benefit from utilizing the asset. Contingent upon the picked cost apportionment or depreciation rate, depreciation charges can be variable, straight-lined, or accelerated over the valuable life of an asset.

Accelerated depreciation utilizes decreasing charge methods, including the sum-of-the-years' digits (SYD), giving higher depreciation costs in prior years and lower depreciation charges in later periods. Under the SYD method, the depreciation rate percentage for every year is calculated as the number of years in excess asset life for that very year separated by the sum of outstanding asset life consistently through the asset's life. As the depreciation rate diminishes after some time, so does the depreciation charge.

It's a good idea to utilize a accelerated depreciation method, for example, the SYD method when an asset will lose the greater part of its value close to the beginning of its useful life, just like with automobiles, for instance. In the five-year model over, the SYD method would yield the following depreciation schedule:

  • Year 1: 5/15 = 33%
  • Year 2: 4/15 = 27%
  • Year 3: 3/15 = 20%
  • Year 4: 2/15 = 13%
  • Year 5: 1/15 = 7%

The percentages for these years ought to amount to 100%.

Accelerated depreciation allows for the probability of assets to decline after some time, and furthermore to require higher repair and maintenance costs in later years than when initially purchased.

When a company settles on a depreciation method it normally needs to stick with that depreciation method proceeding for that specific asset. Changing would require a correction of all recently submitted financial statements.

Economic Usefulness of Assets

The accelerated or decreasing cost allocation for asset depreciation, for example, the sum-of-the-years' digits method, better matches the cost of utilizing an asset to the benefit the asset use gives every year over the economic life of the asset.

The benefit of utilizing an asset will decline as the asset ages, meaning an asset offers greater support value in prior years. Subsequently, charging higher depreciation costs from the beginning and decreasing depreciation charges in later years mirrors the reality of an asset's changing economic value over the long haul.

Repair and Maintenance Costs

As an asset progresses in years, repair and maintenance costs are to rise as the asset needs repairs on a more regular basis; once more, think about an automobile for instance. A decreasing depreciation charge over the long run gives a steady overall cost between depreciation charges and repair and maintenance costs, the last option of which are lower in the prior years and can offset higher depreciation charges from the beginning.

Without accelerated depreciation and decreasing depreciation charges, earnings, as reported, might be mutilated too high almost immediately and too low later on — when depreciation cost allocation doesn't oblige genuine changes in repair and maintenance costs over an asset's valuable life.

Highlights

  • Standard depreciation, or straight-line depreciation, uses a similar monetary cost the entire asset's helpful life.
  • It is best to utilize an accelerated depreciation method, like the SYD method, when an asset will lose the greater part of its value around the beginning of its helpful life
  • Depreciation is an accounting technique that includes matching the cost of utilizing a substantial asset with the advantage acquired over its valuable life.
  • Accelerated depreciation contrasts from standard depreciation by assuming higher depreciation costs initially and lower costs in later years, mirroring the way that the benefit of utilizing an asset will be reduced as the asset ages.
  • Sum-of-the-years' digits is an accelerated method for deciding an asset's expected depreciation over the long run.