Investing Sum of the Years': Digits Accelerated Depreciation Method By Joshua Kennon Joshua Kennon Joshua Kennon is an expert on investing, assets and markets, and retirement planning. He is the managing director and co-founder of Kennon-Green & Co., an asset management firm. learn about our editorial policies Updated on May 24, 2021 Reviewed by Chip Stapleton Fact checked by Vikki Velasquez Photo: Towfiqu Photography / Getty Images Many companies calculate their depreciation expense using an accounting method called accelerated depreciation. In this depreciation scenario, an asset, such as a piece of equipment, has its book value reduced on the balance sheet at a faster rate than a traditional straight-line depreciation method. Companies use a few different methods for achieving this, such as the Sum of Years' Digits (SYD) method. Reasons to Accelerate Depreciation Companies typically use accelerated depreciation to minimize their taxable income because it allows for greater depreciation expense deductions in the earlier years of the equipment or asset's life. Accelerated depreciation methods could also be seen as more accurate, as they assume that an asset loses a majority of its value in the first few years of its use. Calculating Sum of the Years' Digits Depreciation To calculate depreciation charges using the sum of the years' digits method, you'll need to first get the depreciable base, which is the cost of the asset. Second, you'll calculate the salvage value of the asset, which works the same for both the SYD and straight-line depreciation methods. For example, if you buy an asset for $100,000 and it can be sold for an estimated $10,000 at the end of its useful life, the balance subject to depreciation is $90,000, and the salvage value is $10,000. Next, calculate the applicable percentage of depreciation for each year of the asset's life. For the following example, the cost of the asset is $25,000, with zero salvage value for simplification, and it has a depreciable life of five years. To do this under the sum of the years' digits method, you can use either of the following methods. With the first method, you can take the expected life of an asset in years, count backward to one, then add the figures together. For example, for an asset with five years of estimated useful life, you would perform the following calculation: 5 + 4 + 3 + 2 + 1 = 15. Alternatively, you can use the following equation to calculate the applicable percentage: depreciable life * (depreciable life + 1) ÷ 2. Using our current example, this would become: 5 * (5+1) ÷ 2 = 15 The Formula in Action Using the information from the example above, you would calculate the applicable depreciation percentage for each depreciable year. In the first year, the asset value subject to depreciation would be expensed 5/15 in value (33.33%). In the second year, the asset value subject to depreciation would be expensed 4/15 (26.67%). In the third year, the asset value subject to depreciation would be expensed 3/15 (20%). This would continue until the asset was fully depreciated, having been completely expensed on the income statement and fully depreciated on the balance sheet. To show the example in table format, the SYD depreciation expense for the life of this asset would be as follows: Year SYD Fraction Applicable Percentage Depreciation Rate Annual Depreciation Expense on Income Statement Remaining Depreciation Base Salvage Value 1 5/15 33.33 percent $8,333.33 $16,666.67 $0 2 4/15 26.67 percent $6,666.67 $10,000.00 $0 3 3/15 20.00 percent $5,000.00 $5,000.00 $0 4 2/15 13.33 percent $3,333.33 $1,666.67 $0 5 1/15 6.67 percent $1,666.67 $10,000 $0 Example Depreciation Calculation Using Sum of the Years' Digits Depreciation Method The same asset, using straight-line depreciation and zero salvage value, would be depreciated at $5,000 per year for five years ($25,000 ÷ 5) until the asset depreciates to zero value. The same company, with the exact same assets, would appear to be earning different amounts of profit and have assets carried at different values on the balance sheet, depending upon which depreciation method was utilized. In both cases, the economic reality is the same. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Internal Revenue Service. "Topic No. 704 Depreciation." Accessed March 3, 2021. Related Articles What Is Accumulated Depreciation? Straight Line Depreciation Method Accumulated Depreciation on the Balance Sheet Double Declining Balance Depreciation Method Accelerated Depreciation for Business Tax Savings How Do I Calculate Depreciation? What Is Depreciation? How To Determine an Asset's Salvage Value Amortization vs. Depreciation: What's the Difference? Depreciation Definition and Calculation Methods How Depreciation Benefits Your Business Accumulated Depreciation on Your Business Balance Sheet What Is the Alternative Depreciation System? How To Calculate the Amortization of Intangible Assets How Depreciating Assets Can Affect Your Business Taxes What Are Noncash Expenses? Newsletter Sign Up By clicking “Accept All Cookies”, you agree to the storing of cookies on your device to enhance site navigation, analyze site usage, and assist in our marketing efforts. Cookies Settings Accept All Cookies