Here are the Sum of the Years Digits (SYD) Depreciation Method: Definition, Formula, and Example

kelolalaut.com The Sum-of-the-Years-Digits (SYD) method is an accelerated depreciation technique used to allocate a higher depreciation expense in the early years of an asset’s useful life, gradually decreasing over time. This method is suitable for assets with higher productivity in their initial years and declining efficiency over time, such as vehicles, electronic equipment, and production machinery.

Formula for the Sum-of-the-Years-Digits Method

Depreciation is calculated using the following formula:

Depreciation for year-n = Remaining Life of Asset / Sum of the Years Digits x ( Acquisition Cost-Salvage Value)

Explanation:

• Remaining Life of Asset       : The number of years left in the asset’s useful life at a specific year.
• Sum of the Years Digits        : The sum of all years in the asset’s useful life, calculated as:

Sum of the years Digits = n + ( n + 1 ) + ( n + 2 ) +…+1 = n(n+1)/2

• Acquisition Cost        : The initial cost incurred to obtain the fixed asset.
• Salvage Value             : The estimated residual value of the asset at the end of its useful life.

Advantages and Disadvantages of the SYD Method

Advantages:

• Higher Depreciation Expense in the Early Years
  Ideal for assets that experience more intensive use in the first few years.
• More Accurate Reflection of Asset Value Decline
  Recognizes that assets tend to lose value faster in the initial years of usage.
• Better Financial Planning
  Helps businesses with tax planning and cash flow management due to higher depreciation expenses at the beginning.

Disadvantages:

• Uneven Depreciation Expenses :
  Since depreciation decreases every year, financial statements may appear less stable.
• More Complex than the Straight-Line Method :
  Compared to the straight-line depreciation method, this approach requires additional calculations using year digits as a divisor.

Example Calculation of the Sum-of-the-Years-Digits Method

A company purchases a machine for Rp 100,000,000, with a useful life of 5 years and a salvage value of Rp 10,000,000.

Step 1: Calculate the Sum of the Years Digits

5+4+3+2+1= 15

Step 2: Calculate Annual Depreciation

Depreciable Amount =100,000,000−10,000,000 = 90,000,000

Year 1 :

Depreciation = 5/15 x 90.000.000 = 30.000.000

Book Value at Year-End:

100,000,000 − 30,000,000 =70,000,000

Year 2:

Depreciation = 4/ 15×90,000,000 = 24,000,000

Book Value at Year-End:

70,000,000 −24,000,000 = 46,000,000

Year 3:

Depreciation = 3/15 × 90,000,000 = 18,000,000

Book Value at Year-End:

46,000,000 − 18,000,000 = 28,000,000

The process continues until the asset reaches its residual value.

Conclusion

The Sum-of-the-Years-Digits depreciation method is an accelerated technique that applies a higher depreciation expense in the early years of an asset’s life, decreasing over time. It is beneficial for assets that lose value rapidly in the beginning, but it requires more complex calculations than the straight-line method.

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