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SUM OF THE YEAR'S DIGITS Method of Depreciation - YouTube
Channel: Accounting Stuff
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Hey there welcome back to
Accounting Stuff
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I'm James and in this video you'll
find out how to calculate depreciation
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using the Sum of the Year’s Digits method
so let's get cracking!
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Depreciation is the process of
reducing the book value of a
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tangible fixed asset due to use
wear-and-tear
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the passing of time
or obsolescence
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Sum of the Year’s Digits depreciation
is an accelerated variable cost
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depreciation method where the
expense is higher in early years
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If you saw my double declining
balance video last week
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you might notice that this
description hasn't changed
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That's because both of these
are accelerated variable cost
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depreciation methods but
the calculation behind
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each one is different
as you'll soon see
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Time for an example
you know that big empty field you own
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the one behind your house that
catches all the sun
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Anyways one day you decide to
turn it into a solar farm
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A solar panel is a tangible fixed asset
it's tangible because you can touch it
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and it's fixed because you
plan to use it for a long time
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Each panel cost you $25,000
and is expected to last
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for five years
By the way did I mention
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that you're also really really rich
After that their value will drop
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right down to $5,000
Let's depreciate one of these panels
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using the Sum of the Year’s Digits method
Step 1
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Write down what you know
Your asset is a solar panel and
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we’ll depreciate it using the
Sum of the Year’s Digits method
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Asset cost is what you initially paid for it
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$25,000
It's residual value at the end of
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its useful life is $5,000
and it's useful life is five years
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We’ll leave depreciation rate
and depreciable cost blank for now
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because we'll work these out in step 3
But first Step 2
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Build a depreciation schedule
The depreciation schedule is a table
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and for the Sum of the Year’s Digits method
it has six columns
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So that's one more than we used for
the straight-line and
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double declining balance methods
We have year
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opening book value
depreciation rate
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depreciation expense
accumulated
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depreciation and
closing book value
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Can you guess which one's new?
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Its depreciation rate
we're going to give depreciation rate
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its own column because this is
going to change each year
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Step 3
Calculate the depreciation rate
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depreciation expense
accumulated depreciation and
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book values for each period
Time to fill this sucker out
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We'll begin with the first
accounting period that's year 1
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You're opening book value is the
carrying amount of your solar panel
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at the start of the year
This is your first accounting period
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so that's going to match your
asset cost of $25,000
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Now let's work out your
Sum of the Year’s Digits
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depreciation rate for year 1
By the way we often shorten
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Sum of the Year’s Digits to just SYD
It's just quicker to say I guess…
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You're SYD depreciation rate is
equal to the remaining useful life
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of your asset divided by the
Sum of the Year’s Digits
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Your remaining useful life is
exactly what it sounds like
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How many useful years you have left on
your solar panel
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We said at the start
that it has a useful life of five years
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so in year one its remaining useful life
is also five years
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but be careful because this top line
changes each period
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Now the bottom line is called the
Sum of the Year’s Digits
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and it doesn't change
we only have to work it out once
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There are two ways to do that
and I'll show you both
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The long way is more intuitive
we are after the
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Sum of the Year’s Digits
so all we need to do is add up
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each year of your solar panel's
5 year useful life
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so five plus four plus three
plus two plus one which is 15 years
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Seriously that's all there is to it
Now for the short way
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mathematicians call a series like this
the sum of an arithmetic series
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and they've derived a short formula
that'll give us the answer every time
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Sum of the Year’s Digits is equal to
useful life multiplied by useful life plus
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one divided by two
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So let's test it out
five years multiplied by six years
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divided by two gives us 15 years
I have included this in
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my depreciation sheet so if
you’d like to support this channel
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and keep a handy little reminder
of the formula then you can
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buy a copy of it on my website
I'll link to it down in the description
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Choose your method
it doesn't matter which
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and let's move on
Your depreciation rate for year one
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is five years which changes each year
divided by 15 years which
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remains the same
this gives us 1/3 or 33.33%
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Now let's calculate your
depreciation expense
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This is your SYD depreciation rate
multiplied by your depreciable cost
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It represents the amount of
your solar panel that you’ll write off
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as an expense to your
income statement during the year
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Keep in mind that the
Sum of the Year’s Digits method is an
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accelerated variable cost
depreciation method where the
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depreciation expense is higher
in early years
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We'll come back to this graph
in a moment
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We've already worked out your
depreciation rate for year one
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it’s 33.33%.
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Your depreciable cost is the
difference between your asset cost
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and residual value
$25,000 minus $5,000 which is $20,000
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this is the chunk of your solar panel's
book value which we'll depreciate
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over its useful life
One third of $20,000 is $6,667
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your solar panel’s depreciation expense
in year one
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Accumulated depreciation is the sum of
all depreciation expenses incurred to date
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In year one it’s the same as your
depreciation expense
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Closing book value is the
carrying amount of your solar panel
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at the end of the year this is the
net asset amount that you're holding in
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your balance sheet
We can work it out by taking
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your opening book value of $25,000
minus your depreciation expense of $6,667
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which is $18,333
Now we'll repeat the process
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for the following period
Your closing book value in year one
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becomes your opening book value
in year two
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Your depreciation rate is the
remaining useful life of your asset
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divided by the sum of the years digits
This is year two so your remaining
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useful life has reduced to 4 years
Sum of the Year’s Digits doesn't change
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it's still 15 years so
4 years divided by 15 years gives you an
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SYD depreciation rate of 26.67%
Your depreciation expense is your
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SYD depreciation rate multiplied
by your depreciable cost
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so that's 26.67% multiplied by
$20,000 which is $5,333
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Accumulated depreciation is $12,000
and your closing book value is
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$18,333 - $5,333 which is $13,000
Here's the completed
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depreciation schedule for the whole
of your solar panels useful life
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Your asset cost at the start is
$25,000 and we've written off
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a depreciation expense to your
income statement each year after
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five years the closing book value
of your solar panel has decreased
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to $5,000 which is exactly the same
as the residual value that we
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picked at the start
This is just a handy little check
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to make sure that we've done things right
Let's have another look
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at all of this on the graph
This is your solar panel’s
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book value over time
Your asset cost at the beginning
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is $25,000 and it's residual value
at the end is $5,000
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Your depreciable cost is the
difference between the two
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The solar panel has a
useful life of five years and its
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remaining useful life
decreases over time
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The depreciation expense is variable
because it changes each year
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and it’s accelerated because
it's higher in early years
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But not all variable depreciation methods
are accelerated as you'll see
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in the next video where I'll cover
the units of production method
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Make sure you subscribe
if you'd like to watch that
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You can find all of my depreciation videos
on the depreciation playlist and
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if you'd like a copy of my cheat sheet
then it's right here
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Til next time
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