3.14: Accelerated Depreciation Methods- Sum-of-the-Years' Digits (For reporting purposes only)
There are two more methods, which we shall examine, both of which may be referred to as “accelerated ” depreciation methods because in the early years there will be more depreciation expense than in the la t er years.
You’ll remember that the ratio we used in the given example for St raight L ine was 20% . Under “Sum-of-the-years’ digits” (SOYD), we apply a new ratio against the $1,000,000 depreciable amount.
I n the denominator for the SOYD ratio, we calculate the sum of the year s ’ digits, which , in this five-year example is: 5 + 4 + 3 + 2 + 1 = 15.
In the numerator , we use the reverse order of the years , starting with five , and then go ing backwards each year . So, in year one, we expense 5/15 of $1,000,000 = $333,333, and reduce the balance accordingly. In the second year the ratio is 4/15. In the third, year the ratio is 3/15, or , as it happens, the same 20% that we used in the straight-line method; you’ll note that the depreciation expense after this third year will be less than under straight-line. At this rate, you will note that after five years we will have depreciated 1 5/15 or 100% of the depreciable amount.