Sum of years digits depreciation is an accelerated depreciation method that is based on the assumption that assets incur greater depreciation during the early years of the asset’s life. Sum of years digits depreciation is based on the principle that a fractional part of the depreciable cost of the asset is debited to the depreciation expense each year. The denominator of the fractional portion to debit represents the sum of the year’s digits.
The sum of the years digits is determined by adding together the numbers representing the years of an asset’s useful life. For example, if an asset is expected to have a useful life of five years, the digits representing that useful life are as follows: 1, 2, 3, 4, and 5. The sum of the year’s digits is determined by adding each of these digits together:
1 + 2 + 3 + 4 + 5 = 15
However, you can also calculate the sum of years digits using the following formula:
Estimated useful life in years x [Estimated useful life in years + 1) / 2] = Sum of years digits
Using this formula, the sum of years digits for an asset with an expected useful life of five years is calculated as follows:
5 years x [(5 years + 1) / 2] = 15
The sum of years digits for an asset whose expected useful life is five years is 15, which is used as the denominator of the fraction to use in sum of years digits formula.
Additionally, if an asset is expected to have a useful life of five years, the digits representing the useful life are as follows: 1, 2, 3, 4, and 5. The numerator of the fractional portion to debit for any year is the number of years remaining in an asset’s useful life. For an asset whose expected useful life is five years, the numerator of the fraction is 5 for the first year, 4 for the second year, 3 for the third year, etc.
To calculate the sum of years digits depreciation values, Datastream 7i generates intermediate calculations that determine the annualized depreciation rate, which is then used in the finalized depreciation calculation.
Datastream 7i calculates the finalized sum of years digits annual depreciation expense based on the following formula:
(Original value – Residual value) x Remaining years of life / Sum of years digits = Annual depreciation expense
When entering depreciation data for sum of years digits, select Sum of years digits as the Depreciation method, and then enter values for Original value, Estimated useful life, Unit of measure, and Residual value.