32 264 the sum of the years digits method 264 the sum

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2.6.4 The Sum of the Years Digits Method2.6.4 The Sum of the Years Digits MethodLike the declining balance method, the sum of the year s digits method provides a higherLike the declining balance method, the sum of the year s digits method provides a higheramount of periodic depreciation expense in the earlier use of the asset's life and declineamount of periodic depreciation expense in the earlier use of the asset's life and declinedepreciation expense thereafter because a successively smaller fraction is applied each year todepreciation expense thereafter because a successively smaller fraction is applied each year tothe depreciable cost of the asset. Under this method, first we must determine the denominatorthe depreciable cost of the asset. Under this method, first we must determine the denominatorof the fraction, which is the sum of the digits representing the years of life. While computingof the fraction, which is the sum of the digits representing the years of life. While computingdepreciation, the denominator of the fraction is unchanged and would remain the same. Ondepreciation, the denominator of the fraction is unchanged and would remain the same. Onthe other hand the numerator of the fraction, decreases year by year (4/10, 3/10/2/10/1/10). Atthe other hand the numerator of the fraction, decreases year by year (4/10, 3/10/2/10/1/10). Atthe end of the asset s useful life, the balance remaining should be equal to the salvage value.the end of the asset s useful life, the balance remaining should be equal to the salvage value.For example, for a plant asset with an estimated life of 4 years, the denominator of theFor example, for a plant asset with an estimated life of 4 years, the denominator of thefraction is 4+3+2+1 = 10. The depreciation schedule for this method is as follows:fraction is 4+3+2+1 = 10. The depreciation schedule for this method is as follows:Depreciation Schedule- Sum - of - the - Years - Digits MethodDepreciation Schedule- Sum - of - the - Years - Digits MethodYearYearDepreciableDepreciableCostCostRateRateYearlyYearlyDepreciationDepreciationAccumulatedAccumulatedDepreciationDepreciationBook ValueBook ValueDate of purchaseDate of purchaseBr6000Br6000---Br. 6000Br. 6000End of first yearEnd of first year600060004/104/10Br.2200Br.2200Br. 2200Br. 220038003800End of second yearEnd of second year600060003/103/10165016503850385021502150End of third yearEnd of third year600060002/102/10110011004950495010501050End of fourth yearEnd of fourth year600060001/101/10550550550055005005002.7 COMPARISON OF DEPRECIATION METHODSThe straight-line depreciation provides a uniform or equal depreciation charges to expenseThe straight-line depreciation provides a uniform or equal depreciation charges to expensethroughout the service life of the asset.throughout the service life of the asset.The production method of depreciation provides for periodic charges to depreciation expenseThe production method of depreciation provides for periodic charges to depreciation expensethat may vary considerably, depending upon the amount of usage of the asset. The productionthat may vary considerably, depending upon the amount of usage of the asset. The productionmethod does not generate a regular pattern because of the random fluctuation of themethod does not generate a regular pattern because of the random fluctuation of thedeprecation from year to year.

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Term
Summer
Professor
Balaramakrishna

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