Sum of Digits Method of Depreciation | Example |

Sum of Digits Method: 

The sum of the digits method is formed due to the decrease in the productivity of an asset with the passage of time. It means that an asset has more useful life in the earlier year. So, that’s why we have to charge depreciation more in the earlier year as compared with the subsequent year of life of an asset. It is slightly similar to the written down value method. In written down value method of depreciation, the amount of depreciation will continue to decrease every year in this method also.

In this method, the amount of depreciation is charged higher in the early year of the whole life of an asset because an asset is more productive in its earlier life as compared with subsequent years of its whole life.

Formula:

Under the Sum of Digits Method, The amount of depreciation is calculated by the following formula:

• Net Cost of an asset =  Purchase price + Expenses paid(amount spent on an asset to convert it into working condition) – Salvage Value of an asset(Scarp value).
• Remaining Life of an Asset(In Years) = Number of years left at the end of the current financial year.
• Sum of all digits of the total life of an asset = means if the life of an asset is 5 year then we have to add the remaining year at the end of each subsequent year. like  5+4+3+2+1 = 15.

Please consider the following example to understand better:

Example: On 01/04/2017 Machinery purchased for Rs 14,00,000/- and paid for transportation charge 1,50,000/- to install the machine in our plant and paid installation charges also for Rs 50,000/-. Scrap value will be Rs 1,00,000/- and the useful life of machinery is 5 year. Year ending 31 March. Calculate the amount of depreciation with the Sum of Digits Method of depreciation. 

Solution:

So, Net Cost of an asset = 14,00,000+1,50,000+50,000-1,00,000 

  =Rs 15,00,000/- 

Journal entries or ledger are the same with the following methods:

• Straight Line Method
• Written down value method
• All method of depreciation.

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