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Sum-of-the-Years’-Digits Method (Depreciation Methods) in Financial Accounting

The sum-of-the-years’-digits (SYD) method is one of several accelerated methods. Such methods result in relatively large depreciation charges in the early years of an asset’s life. This pattern can be justified by the notion that some assets are more efficient in the earlier years of their life and therefore render greater services. In other words, they help generate more revenue. To properly match costs with revenues, expenses should be larger in those early years.

SYD annual depreciation expense is calculated by multiplying an asset’s depreciable basis by a fraction that varies from year to year. The denominator is always the sum of the years’ digits in the useful life of the asset. For an asset with a five-year life, the denominator would be 5 + 4 + 3 + 2 + 1 = 15. The sum of the years’ digits can be computed with the following formula:

in which N equals the number of years in the asset’s life. For an asset with a five-year life, the computation is

The fraction’s numerator is the number of years remaining in the asset’s useful life at the beginning of the year for which depreciation is being calculated. Therefore, depreciation expense for years 1 and 2 would be $1,500 and $1,200, respectively.

Under the sum-of-the-years’ digits method, depreciation expense declines each year. At the end of the fifth year, the entire depreciable basis of $4,500 will be depreciated.

To make sure you understand this concept, verify the calculation of year 5’s depreciation expense of $300.

Depreciation Methods and Topics

Property, Plant, and Equipment (PPE) Topics

Related Noncurrent Assets Topics