Sum of Years Digits Depreciation
The sum of years digits depreciation method is another accelerated depreciation method that allows for faster depreciation that straight line depreciation, but less than the declining balance depreciation method. It works by multiplying the depreciable cost of an asset by a declining fraction each year.
As an example assume you have an asset with a cost of $10,000, a salvage value of $3000 and a useful life of 4 years.
The first calculation is to determine the digits and calculate their sum. In this example the digits for 4 years are 4, 3, 2 and 1. Adding those digits together results in 10 (4+3+2+1=10).
You then use a depreciation rate based on fractions i.e. 4/10 for the first year, 3/10 for the second year, 2/10 for the third year and 1/10 for the fourth year. As you can see this allows for the greatest part of the assets cost to be depreciated at the beginning of its useful life.