The sum-of-years digits method is a way to calculate accelerated depreciation for an asset. The method takes into account the original cost of the asset, the salvage value it can be sold for, and the useful life of the asset in years. It takes the total number of years the asset can be depreciated, adds up those years, and uses that number as a base to weight the depreciation amounts in an accelerated way. For example, if an asset can be depreciated over four years, the sum-of-digits method adds together 4 + 3 + 2 + 1 to get 10 years total. In the first year, the asset’s depreciation percent is 4/10 or 40%, in the second year it’s 3/10 or 30%, and so on.
As an example, assume an asset has an original cost of $100,000. It has a useful life of four years and a salvage value of $15,000. This means the depreciable value of the asset is $100,000 minus $15,000, or $85,000. The sum-of-digits depreciation schedule is as follows:
Year 1: Starting book value is $100,000 and the depreciation amount is 40%, or $34,000. The ending book value is $66,000.
Year 2: Starting book value is $66,000 and the depreciation amount is 30%, or $25,500. The ending book value is $40,500.
Year 3: Starting book value is $40,500 and the depreciation amount is 20%, or $17,000. The ending book value is $23,500.
Year 4: Starting book value is $23,500 and the depreciation amount is 10%, or $8,500. The ending book value is $15,000.