22:18
Faizan
As a Project Management Professional (PMP) you need to be aware of certain accounting concepts such as how to calculate "Depreciation" on some of the high-priced items purchased on your project's budget.
In accounting, one of the important accelerated depreciation methods is the Sum of the Years' Digits approach. This type of depreciation is used to accurately reflect the decline of a fixed asset's usefulness over a period of years until its book value is equal to its salvage value.
This method is used to calculate amortization for assets that are more productive when first purchased, but rapidly show loss in productivity as time progresses.
The method used to calculate the depreciable amount involves calculating a figure known as the Sum of the Years' Digits; hence, the name. The formula is as follows:
Sum of the Years' Digits = (n X (n+1)) /2, where n is the number of useful years estimated for the asset in question.
The depreciation itself is calculated using the formula below:
Depreciation = Depreciable Base x (Useful Life Remaining / Sum of Years' Digits)
The depreciable base in the formula is nothing but the maximum amount by which that asset can be depreciated before it reaches its salvage price, and is calculated as the difference between the purchase price and the salvage value.
Depreciable Base = Original Purchase Price - Salvage Value
Example:
Let us assume the following attributes for an asset:
Original Purchase Price: $45,000
Salvage Value: $5,000
Number of Useful Years: 4
Sum of Years Digits = 4 + 3 + 2 + 1 = 10
which can also be calculated by this formula:
SYD = (4 X (4+1)) / 2 = 10
In this case, the depreciable value will be:
$45,000 - $5,000 = $40,000
In accounting, one of the important accelerated depreciation methods is the Sum of the Years' Digits approach. This type of depreciation is used to accurately reflect the decline of a fixed asset's usefulness over a period of years until its book value is equal to its salvage value.
This method is used to calculate amortization for assets that are more productive when first purchased, but rapidly show loss in productivity as time progresses.
The method used to calculate the depreciable amount involves calculating a figure known as the Sum of the Years' Digits; hence, the name. The formula is as follows:
Sum of the Years' Digits = (n X (n+1)) /2, where n is the number of useful years estimated for the asset in question.
The depreciation itself is calculated using the formula below:
Depreciation = Depreciable Base x (Useful Life Remaining / Sum of Years' Digits)
The depreciable base in the formula is nothing but the maximum amount by which that asset can be depreciated before it reaches its salvage price, and is calculated as the difference between the purchase price and the salvage value.
Depreciable Base = Original Purchase Price - Salvage Value
Example:
Let us assume the following attributes for an asset:
Original Purchase Price: $45,000
Salvage Value: $5,000
Number of Useful Years: 4
Sum of Years Digits = 4 + 3 + 2 + 1 = 10
which can also be calculated by this formula:
SYD = (4 X (4+1)) / 2 = 10
In this case, the depreciable value will be:
$45,000 - $5,000 = $40,000
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