How to Depreciate Assets Using the Sum-of-Years-Digits Method
If your asset loses a greater portion of its useful life in the early years, you can speed up its depreciation by using the Sum-of-Years-Digits (SYD) method. This method allows you to write off higher depreciation expenses in the earlier years of useful life and lower depreciation in later years. When you use Sum-of-Years-Digits, you assume that the fixed asset will be used less in later years.
One big disadvantage of writing off assets quickly is that the higher depreciation expense lowers your business’s net income.
Sum-of-Years-Digits requires a three-step calculation:
Find the SYD using this formula, with n representing the number of years of estimated useful life remaining as of the start of the fiscal year:
n(n+1) / 2 = SYD
Find the applicable fraction using this formula: n ÷ SYD = Applicable fraction
Calculate the depreciation expense using this formula:
(Cost – Salvage value) x Applicable fraction = Depreciation expense
To calculate the first year of the depreciation expense on a truck, this formula works like so: SYD: 5(5+1) / 2 = 15.
The depreciation expense written off during the truck’s first year of life is $2,666.67 higher than it is when it’s calculated using the Straight-Line depreciation method. If you do the same calculation for the remaining years of useful life, you get the following results:
Year 2: $5,333.33
Year 3: $4,000.00
Year 4: $2,666.67
Year 5: $1,333.33
By Year 3, $16,000 has been written off, 80 percent of the depreciable amount for the truck.