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Sum of Year Digits Method of Depreciation | Calculation | Example - YouTube
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clicking the bell icon today we have a
topic with us as sum of digit method of
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depreciation we'll try and incorporate
this method in our discussion today the
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first and the foremost thing the first
and the foremost thing that we need to
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learn here is that you know what exactly
the meaning of this method is all about
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well some of digit method or the sum of
the year depreciation method it is in
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what we call as accelerated depreciation
method whereby you know the method
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declines the value of the asset at an
accelerated rate so most of the
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depreciation of the asset is recognized
in the first few years of useful life
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and although the amount of the
depreciation remains the same whether
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the company uses the SLM method or
double declining balance method DBM or
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the some of years digits method so it is
just that the amount of the timing of
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the depreciation differs in all the
three approaches right so with some of
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the year digit method method it causes a
variability in the reported net income
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of the company okay and the assets are
depreciated at of much more higher rate
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in the early years and thus the net
income is lower right in the early years
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of the asset but as the useful life of
the asset increases the reported net
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income the reported net income also
increases so how are using this method
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can indirectly impact your cash flows of
the government since you know the
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depreciation amount is high initial use
and reported net income is lower and the
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tax implications is gonna be lower ok
we'll start with the steps here so that
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we'll have a clear idea first you need
to calculate the depreciable amount
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which is equal to the assets total cost
of acquisition minus the salvage value
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so the acquisition cost is the capital
expenditure capex of the company that
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has made to acquire the asset and
depreciation amount that is the depth
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amount the appreciable amount is equal
to the total acquisition cost less the
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salvage value okay
second we need to calculate these some
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of the useful life that is the sum of
the useful life of the years in of the
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asset third you need some of the year
depreciation method at appreciable
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amount the depth amount is multiplied
the depreciation of the amount is
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multiplied by the depreciation factor of
each year now the depreciation factor
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the you of the useful life of the asset
is divided by the sum of the useful life
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or useful years of the asset fourth the
sum of the year depreciation is then
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calculated is equal to number of useful
life or the number of the useful years
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divided by the sum of useful years
into depreciation amount and finally
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let's say the useful life is three so
the sum of the useful life in the ears
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is going to be is equal to 3 +
2 + 1 right that is equal to six
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does the factor of each year will be 3
divided by 6 then 2 divided by 6 then 1
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divided by 6 respectively for 1 and 2 and 3 years okay now we will try and
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incorporate this in the example so that
we get more clear idea we'll take the
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example you see let's understand the
concept with an example a company has
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let's say purchase some computers that
is worth $5 million dollars and it
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costs them let's say $2,00,000
and to transport this is a
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transportation cost and the company
considered that the useful life is 5
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years and they can expire the computer
the accompany the useful so basically
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the salvage value will be at $1,00,000 so now considering the above
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example let's try and create the
depreciation schedule for the asset
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using the summer depreciation method the
step one over here will go as the total
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acquisition cost that is equal to $5
million right plus 2,00,000 transportation
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cost that is $5.2 million the salvage
value is 1 lakh right the useful life of
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the asset is 5 years so the depreciation
amount is gonna be your acquisition cost
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minus salvage value that's 510 now in
the step to calculate the sum of useful
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life that is is equal to 5 + 4 + 3 + 2 +
1 that's 15 step 3
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step 3 is going to be you need to
calculate the depreciation factor here
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so depreciation factor well so year 1
2 3 4 and 5 it's gonna be
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5 divided by 15 before divided by
15 or it's not showing that way so
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it's 5 year by 15 for 15 three 15 -
15 + 115 then step 4 is going to be
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calculate the depreciation for each year
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so the depreciation expense for the each
year is going to be is equal to $5
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million divided by into into 5 divided
by 15 right so that will be their
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deposition for each year so the amount
to be depreciated is calculated as I'll
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show you in the table rate we'll start
with year amount to be depreciated
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depreciation factor
and depreciation expense right so 1
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2 3 4 and 5 what is the
amount of it appreciated 510 the
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depreciation factor is equal to 5/15 right so this will be in two
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yeah so that's $1,70,000 the next
will be amount of depreciation divided
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by depreciation expense right likewise
we calculate the depreciation expense
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for 2 3 and 4 years we had the
depreciation factor of 4/15
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is equal to 3/15 is
equal to 2/15 and is
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equal to 1/15 so just
carry down the number here we have the
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whole depreciation schedule prepared for
us right so this is how the number
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should go about 340,199 okay how about
we just reduce your decimals here this
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reduce down the decimals so we have the
exact amount so well this is how it
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should be prepared now there are some
advantages of this method see the first
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is that you know the sum of your digit
method is helpful for matching the cost
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of the asset and benefit the asset which
provides over the useful life of the
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asset and the benefit of the asset
declines as it's useful life decreases
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and the asset grows old as does you know
charging the assets cost higher in the
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early years and reducing the amount as
your passes by reflects the economic
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condition the benefit of the asset
second when the asset grows older and
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has been used for some good years it
repairs and maintenance cost is rising
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the repairs in the maintenance cost can
offset the low depreciation cost of the
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asset in the later period of the useful
life and finally the sum of the year
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depreciation is useful depreciating the
asset that may be obsolete or quickly so
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on a conclusion note some of the year
digit method is accelerated depth method
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that can be used to depreciate value of
the asset over the useful life of the
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asset and this method aims to depreciate
the asset attend accelerated the rate
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that is higher depreciation expense in
all yours and lower depreciation expense
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in the later year so it is useful for
deferring the tax payments and specially
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used for the asset which have lower use
in life and may become obsolete quickly
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so that's it for this particular topic
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