Another way of accounting for depreciation expense is to use one of the accelerated methods. These include the Sum of the Year’s Digits and the Declining Balance (either 150% or 200%] methods. These accelerated depreciation methods are more conservative and, in most cases, accurate. They assume that an asset loses a majority of its value in the first several years of use.
Sum of the Years Digits
To calculate depreciation charges using the sum of the year’s digits method, take the expected life of an asset (in years) count back to one and add the figures together. Example:
10 years useful life = 10 + 9 + 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 Sum of the years = 55
In the first year, the asset would be depreciated 10/55 in value (the fraction 10/55 is equal to 18.18%), 9/55 (16.36%) the second year, 8/55 (14.54%) the third year, etc. Going back to our example from the straight-line discussion, a $5,000 computer with a $200 salvage value and 3 years useful life would be calculated as follows:
3 years useful life = 3 + 2 + 1 Sum of the years = 6
Taking $5,000 - $200 we have a depreciation base of $4,800. In the first year, the computer would be depreciated by 3/6ths (50%), the second year, by 2/6 (33.33%) and the third and final year by the remaining 1/6 (16.67%). This would have translated into depreciation charges of $2,400 the first year, $1,599.84 the second year, and $800.16 the third year. The straight-line example would have simply charged $1,600 each year, distributed evenly over the three years useful life.
This page is part of Investing Lesson 4 - How to Read an Income Statement. To go back to the beginning, see the Table of Contents.