It refers to any of the methods of depreciation that charges a higher chunk of the cost of the asset in the earlier years of its useful life rather than the later years and with time, the depreciation expenses decrease.
It is called “accelerated” because it depreciates the asset at a faster rate than the usual straight-line method.
Sum of year’s digits and double-declining methods are examples of accelerated depreciation. However, in this article, we’re only going to talk about the sum of the year’s digits.
Companies usually go for this method of depreciation to avoid higher income taxes since depreciation reduces the taxable income and also because this method correctly assumes that a fixed asset is most productive during its early life.
Calculation of depreciation through the sum of year’s digits:
In order to calculate the depreciation, the first thing you need to know is the depreciable amount and the useful life of the asset. Through the useful life of the asset, we calculate the applicable rate of depreciation.
In the sum of year’s digits method, the rate of depreciation is different every year which is the reason why this method usually results in errors too. Let me explain this through an example.
Steve Ltd. purchased an asset at a cost of $25,000 on 1st January 2011. The estimated useful life and scrap value of the asset are 5 years and $5000, respectively. Calculate annual depreciation expense for the years 2011 to 2015.
The depreciable amount of the asset is calculated by subtracting the residual or scrap value from the cost of the asset. In our example, the scrap value would amount to $20,000 ($25000 – $5000).
Since the useful life of the asset is 5 in our example, the sum of year’s digits would be calculated as follows:
Now we will calculate the sum of year’s digits by counting the useful life backward and then summing it up.
5 + 4 + 3 + 2 + 1 = 15
Alternatively, it can be calculated by the following formula:
= Useful Life of Assets * (Useful Life of Assets + 1)/2
= 5 * (5+1)/2=15 =
Next, we will assign the remaining useful life of the asset to each year as shown below and then calculate the applicable rate of depreciation:
|Year||Useful life||Rate of depreciation|
|2011||5||5/15 x 100 = 33.33%|
|2012||4||4/15 x 100 = 26.67%|
|2013||3||3/15 x 100 = 20%|
|2014||2||2/15 x 100 = 13.33 %|
|2015||1||1/15 x 100 = 6.67%|
Now we will multiply the depreciable amount of the asset with the applicable rate in order to calculate depreciation each year in the following manner:
(Cost – SV) x rate of depreciation:
|Year||Working||Annual depreciation expense ($)|
|2011||20000 x 33.33%||6,666|
|2012||20000 x 26.67%||5,334|
|2013||20000 x 20%||4,000|
|2014||20000 x 13.33%||2,666|
|2015||20000 x 6.67%||1,334|