Sum of the digits
A basis of allocating total costs or income across successive time periods, so as to 'front-end load' them.
In other words, a systematically greater proportion of the total cost or income is allocated to the earlier periods.
A fixed asset has a cost of $12m,
an expected disposal value of $2m,
and an expected useful life of 4 years.
The total expected accounting cost for the 4 year period:
= $12m - $2m
The 'sum of the digits' of the expected holding Years 1 to 4 inclusive
= 1 + 2 + 3 + 4
The allocation proportions (for the total depreciation charges of $10m) are calculated as follows:
= $10m x 4 / 10
= $10m x 3 / 10
= $10m x 2 / 10
= $10m x 1 / 10
The net book value of the fixed asset - applying the depreciation charges calculated above - would be (at the end of each year):
= 12 - 4
= 8 - 3
= 5 - 2
= 3 - 1
Sum of the digits methods are sometimes used to allocate total finance charges - for example under IAS 17 - as a simpler alternative to the Implied rate of interest (or Actuarial) method.