Sum-of-the-years’-digits (SYD) can be described as an expedited method of calculating the depreciation of an asset. This method is based on the anticipated life of the asset and then adds the year’s digits for example, if the asset was anticipated to be used for 5 years then the sum of the years’ digits could be calculated by adding 5 + 4 + 3 , 3 + 1 to make the total of 15. Each digit is divided by this sum to calculate the percentage at which the asset is depreciated every year, beginning with the most significant number in the year 1.
Understanding Sum-of-the-Years'(SYD) Digits
Depreciation is a method for allocation of cost to assets that allocates an asset’s costs to expenses for every period that is expected to reap the benefits of using the asset. Based on the cost apportionment, or depreciation rates the depreciation cost may be flexible, straight-lined, or increased over the time span of an asset.
Accelerated depreciation employs decrease charge methods, which include the sum-of-the-years’-digits (SYD) that result in greater depreciation expenses in earlier years , and lower depreciation costs in later years. With the SYD method the depreciation percentage for each year is calculated by the number of years remaining life of the asset for that same year divided by total of the remaining life of the asset every year for the duration of the life of the asset. As the depreciation rate declines as time passes and so will the depreciation fee.
It is sensible to employ an faster depreciation method, such as the SYD method in cases where an asset will lose the most of its value at the start the useful time like is the case for automobiles for instance. In the example of five years above the SYD method could result in an following schedule of depreciation: schedule:
- Year 1 5/15 = 33 percent
- Year 2 Year 2: 4/15 = 27 percent
- Year 3 Year 3: 3/15 = 20%
- Year 4 Year 4: 2/15 = 13 percent
- Year 5 1/15 = 77 7.7%
The percents for all the years could total 100%..
If a business decides to use an approach to depreciation, it generally must stick to the depreciation method indefinitely for the particular asset. The change would require a revision of the previously filed accounts.
Economic Benefits of Assets
The decreasing or accelerated cost allocation for depreciation of assets, such as the sum of the year’s method, is more a good match for the expense of using an asset in relation to the benefits that the asset gives each year over the period of economic existence of the item.
The benefits of using an asset is diminished as the asset ages which means that an asset will provide higher value of service in the earlier times. So, charging more depreciation expenses early and reducing depreciation costs in later years is a reflection of the fact that assets have evolving economic value in the course of time.
Costs for Repair and Maintenance
As assets age the repair and maintenance expenses are expected to increase because the asset requires repairs more frequently. Again think of an automobile as an illustration. A decrease in the depreciation cost over time provides an ongoing cost for depreciation costs and repair and maintenance expenses and maintenance costs, which are less in earlier years , and may offset the more expensive depreciation costs early on.
Without depreciation that is accelerated and declining depreciation expenses, earnings in the form reported, could be deformed too at the beginning, and too low later in the process if the depreciation cost allocation doesn’t reflect the actual fluctuations in maintenance and repair costs throughout an asset’s time.
