Sum of Years Digit Method of Depreciation
The Sum of years digit method of depreciation is a revised form of Written down value or Reducing balance method of depreciation.
In the sum of years digit method of depreciation, working life of an asset has to be pre-estimated and total depreciation is considered as cost of asset less residual or scrap value.
Calculation of depreciation under sum of years digit method
The amount of annual depreciation under this method goes on decreasing with the use of the Asset.
For calculating depreciation under the sum of years digit method, the denominator becomes the sum of the digits representing the life of the Asset.
Thus if an asset has a life of 5 years, denominator should be 1 + 2 + 3 + 4 + 5 that is equal to 15.
The numerator is the digit taken in reverse order with the efflux of time like 5, 4 3, 2 and 1.
If an asset costs Rupees 50,000, has a residual value of Rupees 5,000 and working life of 5 years, the depreciation will be:
|1||5/15 x (50000-5000)||15,000.00|
|2||4/15 x (50000-5000)||12,000.00|
|3||3/15 x (50000-5000)||9,000.00|
|4||2/15 x (50000-5000)||6,000.00|
|5||1/15 x (50000-5000)||3,000.00|
So the above table clearly explains the calculation process of the yearly depreciation under the sum of years digit method.
Applicability of the sum of years digit method of depreciation
The sum of years digit method of depreciation can be effectively applied for the following assets:
a. Assets having a long useful life, and
b. Assets having a contractual life.
Advantages of Sum of Years Digit Method
The advantages of this method are similar to those of the Written Down Value Method. They are listed below:
- The amount of annual depreciation reduces with the reducing balance of the asset.
- The amount of depreciation is higher in the earlier years when the machine is efficient and the cost of repairs is low. In later years amount of depreciation becomes lower and the amount of repairs increase due to extended use and wear & tear of the Asset. Thus the total charge for depreciation and repairs together remains more or less uniform over the years. This helps in eliminating huge variations in annual profits or losses.
- This method takes care of the obsolescence problem related to the assets as the major part of depreciation is charged in the earlier years. Due to this feature replacement of the assets before the end of its estimated useful life becomes easy and feasible.
That was all about the sum of years digit method of depreciation. Hope that you like the article and if you like it considered subscribing to newsletters via Email. Happy reading and learning!