How to Calculate Sum of the Years Digits Depreciation Method

Sum of the years digits depreciation (SYD) is an accelerated depreciation method that lets you expense more of an asset’s cost in the early years of use than its later years.

SYD depreciation cannot be used for tax purposes or to calculate your tax deduction. However, it is acceptable for accounting purposes. It is especially ideal for recording assets that lose their value quickly, like vehicles and laptop computers, as your books will more accurately reflect the amount paid each year.

Accounting software like QuickBooks Online makes it much easier to create depreciation schedules. You can track and record your depreciation so that, come tax time, you’ll have accurate records that support your refunds. Click here for a free 30 day trial.

Visit QuickBooks Online

If you’d like information about reporting depreciation on your taxes or are not familiar with how depreciation works in general, check out our depreciation guide to learn more.

In this article, we will cover the following:

• How Sum of the Years Digits Depreciation Works
• When Sum of the Years Digits Depreciation is Used
• How to Calculate Sum of the Years Digits Depreciation
• Pros & Cons of using Sum of the Years Digits Depreciation
• How to Record Sum of the Years Digits Depreciation for Book Purposes
• How QuickBooks Can Help Calculate Sum of the Years Digits Depreciation

How Sum of the Years Digits Depreciation Works

Sum of the years digits depreciation allows you to devalue an asset more rapidly in the first years of it’s use than in the later years. This makes it distinct from the straight line depreciation, which spreads the cost of an item evenly over the years it’s used.

Sum of years digits uses a unique calculation that takes the expected life of your asset and adds the digits for each year (1+2+3, etc.) Each year is then divided by this sum to determine its depreciation rate. We’ll show you full sum of years digits calculation below with an example.

When Sum of the Years Digits Depreciation is Used

Although sum of the years digits depreciation cannot be used to calculate a tax deduction, it is still useful for internal bookkeeping purposes. The IRS only allows a few methods for calculating depreciation (MACRS being most common), and the one you use for tax purposes may not actually be the most accurate method to describe your financial situation.

(Note: If you are here to learn about depreciation for taxes, make sure you also check out Section 179. This method allows qualifying businesses to deduct the full value of some assets, up to $500,000, in the year of purchase.)

For example, if your business purchased a lot of fast-depreciating assets this year (like computers or vehicles) you’ll want to make sure that expense is accurately spread out over the years you’ll use them. Counting them all in one year can leave a big hole in your revenue. At the same time, depreciating too slowly can artificially inflate the value of your assets.

Sum of years depreciation is an accelerated method that can more accurately portray how some assets (like vehicles and electronics) lose their value. Double Declining Balance is an even faster method that can similarly be used for these types of assets. See our guide on all depreciation methods here.

How Do I Calculate Sum of the Years Digits Depreciation?

In practice, you will most likely have your tax professional or CPA calculate depreciation for you. However, it is useful to know how the calculation works.

Here is the formula to calculate SYD depreciation:

Step 1 – Calculate the SYD using this formula, with n representing the number of years of estimated useful life remaining as of the start of the fiscal year:

n(n + 1) / 2 = SYD

Step 2 – Calculate the applicable fraction:

n / SYD = Applicable fraction

Step 3 – Calculate the depreciation expense:

(Cost – Salvage value) X Applicable fraction = Depreciation expense

To make the calculations above, you need to have the following info handy:

1. The cost basis of the asset
2. The estimated useful life of the asset
3. The salvage value

We will look at how to determine each of these next.

Cost Basis of the Asset

To calculate the cost basis of an asset you need to include the purchase price, any sales tax paid (if applicable), shipping or delivery costs paid, installation charges, and other costs to make the asset usable in your business.

The formula to calculate the cost basis of an asset is below:

Cost basis of an asset =

Purchase price of the asset + Sales tax + Shipping and delivery costs + Installation charges + Other costs

Estimated Useful Life

The estimated useful life of an asset is basically how long the asset will last before you have to replace it. The IRS has provided guidance on what the useful life should be for all business equipment. Below I have provided you with the recovery period (useful life) of 3, 5 and 7 year property. You can find the full list of properties in IRS Pub 946.

Depreciation Recovery Periods for Business Equipment

Salvage Value

The salvage value is what your asset will be worth at the end of its useful life. In general, this is going to be based on several factors like the overall condition of the asset, including whether or not it is still usable. Have you ever looked up the Kelley Blue Book value of your car to see what it was worth? If so, the value of your car based on Kelley Blue Book is similar to what the salvage value would be for a piece of equipment or furniture.

Putting it All Together

Once you have the cost basis of the asset, the estimated useful life and the salvage value, you are ready to complete the 3-step process of calculating sum of the years digits depreciation:

Step 1 – Calculate the SYD using this formula, with n representing the number of years of estimated useful life remaining as of the start of the fiscal year:

n(n + 1) / 2 = SYD

Step 2 – Calculate the applicable fraction:

n / SYD = Applicable fraction

Step 3 – Calculate the depreciation expense:

(Cost – Salvage value) X Applicable fraction = Depreciation expense

Now let’s see this formula in action. We will walk through a few examples to show you how to calculate depreciation for fixed assets using the sum of the years digits method of depreciation.

Examples: Let’s say you decided to purchase a few things for your office. Below, you will find a list of the fixed assets that you purchased along with their cost basis, estimated salvage value and the useful life based on the IRS table discussed earlier.

Computer Annual Depreciation Expense Calculation:

• Step 1: 5(5+1)/2 = 15 SYD
• Step 2: 5/15 = ⅓ – Applicable fraction
• Step 3: ($1200 – $200) x ⅓ = $333.33 Depreciation expense for Year 1

Monitor Annual Depreciation Expense Calculation:

• Step 1: 5(5+1)/2 = 15 SYD
• Step 2: 5/15 = ⅓ – Applicable fraction
• Step 3: ($300 – $0) x ⅓ = $100 Depreciation expense for Year 1

Desk Annual Depreciation Expense Calculation:

• Step 1: 7(7+1)/2 = 28 SYD
• Step 2: 7/28 = 1/4 Applicable fraction
• Step 3: ($1000 – $300) x 1/4 = $175 Depreciation expense for Year 1

The Sum of the Years Digits depreciation method allows you to take higher depreciation expense in the early years of the asset as we discussed previously. To demonstrate this, we will calculate the depreciation expense for the desk for Year 2.

Desk Annual Depreciation Expense Calculation: Year 2

• Step 1: No calculation required. SYD is the same for all remaining years.
• Step 2: 6/28 = 3/14 Applicable fraction (6 years left for useful life)
• Step 3: ($1000 – $300) x 3/14 = $150 Depreciation expense for Year 2

As you can see, the depreciation expense for the desk decreased from Year 1 ($175) to Year 2 ($150). If we add up the depreciation expense for Years 1 and 2 we get $325 which is a little over one third of the total cost of the desk within the first two years!

What Are the Pros & Cons of Using Sum of the Years Digits Depreciation?

We have already discussed one of the advantages of using the sum of the years digits depreciation, which is that the depreciation expense is larger in the first few years than in later years. This makes SYD depreciation useful for assets like cars and computers that lose a significant amount of their value within the first few years.

A few disadvantages to using the sum of the years digits depreciation are as follows:

• Sum of the years digits is not acceptable for tax purposes. As a result, you will need to keep track of the allowable amount of depreciation for tax purposes vs. what you write off for accounting purposes. You’ll need to use MACRS, Section 179 or straight line depreciation for tax purposes.
• The three step calculation can be frustrating if you are doing it manually.
• By writing off your assets quickly, you increase your business expenses which will lower your business’s net income. This could be problematic when working with lenders or potential investors.

How Do I Record Sum of the Years Digits Depreciation for Accounting Purposes?

If you want the most up-to-date Profit and Loss statement and Balance Sheet reports, then I recommend you record depreciation on a monthly basis. Depreciation expense will increase your overall expenses and reduce your net income on your profit and loss statement. In addition, the accumulated depreciation account will reduce the total value of all fixed assets on the Balance Sheet report.

Here is the journal entry that we would record for the first year of depreciation expense for the computer example. You can record this journal entry in just a few minutes in QuickBooks.

Besides recording depreciation each month, you also need to be able to prove that you own all of your fixed assets. This will require you to keep on file all receipts, contracts, and title documents. In addition to this paperwork, you will need to create a depreciation schedule that includes the date you put the asset in service, the cost of the asset, the recovery period (from the IRS table), and the depreciation amount taken each year. If you use sum of the years digits depreciation for book purposes and MACRS for tax purposes, then these schedules will make it a lot easier for you to keep track of both methods for all of your assets.

Below is an example of what your depreciation schedule should look like:

Depreciation Schedule: 5-Year Property

If you are in the market for an accounting software, we recommend QuickBooks for small businesses. You can track your fixed assets with QuickBooks so it is very easy to export the info to an excel spreadsheet and create your depreciation schedules. In the Can QuickBooks Help Me to Calculate Depreciation section we will show you how to do this. If you don’t have QuickBooks then I recommend you use a spreadsheet program to create your depreciation schedule.

Can QuickBooks Help Me to Calculate Sum of the Years Digits Depreciation?

QuickBooks will not calculate depreciation expense for you. You will be hard pressed to find an accounting software program that does track fixed assets without charging several hundred dollars for it. However, there are programs out there that will keep track of fixed assets and calculate depreciation for you, if you’ve got the dough.

If you don’t have QuickBooks then you will have to calculate depreciation manually. Similar to depreciation schedules, I recommend you use a spreadsheet program to do the calculations as well.

To use QuickBooks to track your fixed assets, you need to create a new account for each fixed asset. Check out our How to Set up the Chart of Accounts video tutorial to learn how to set up a new account in QuickBooks. Click here to sign up for a free 30-day trial. If you are not familiar with how to use QuickBooks, Fit Small Business offers a free course.

Here is a screenshot that shows you how to set up a fixed asset in QuickBooks along with a brief description of the info required:

1. Category Type: Select Fixed Assets
2. Detail Type: Select the type of fixed asset you want to set up (i.e. Vehicles).
3. Name: Enter the name of the asset
4. Description: Enter the same info as the name field or provide any additional info about the asset in this field.
5. Original cost/as of date: Enter the original cost of the asset and the date of purchase.
6. Depreciation/as of date: Enter any accumulated depreciation that you may have already taken.
   • Tip: You will only complete this field if you started depreciating the asset prior to setting it up in QuickBooks.

Once you have created the fixed asset in QuickBooks, you can run a chart of accounts report and filter it to show just fixed assets. Below is a snapshot of this report:

QuickBooks allows you to export this report to Excel. Once you do that, you can save the document like any other spreadsheet and add the additional info you need to create your depreciation schedules.

The Bottom Line

Now that you know how to calculate depreciation expense using the sum of the years digits method, you should record and keep track of it with Quickbooks Online.Click here for a 30 day free trial.

Visit QuickBooks Online