The decreasing accounting amortization method is a way of depreciating the assets that consists in assigning a correlative digit to each year of useful life that corresponds to the series of natural numbers in decreasing form. It is also known as the decreasing digit number method or decreasing digit sum method.
It is the inverse method of increasing amortization and is characterized by having smaller and lower amortization rates, so that in the first years the asset is depreciated by means of a depreciation expense exceeding the rest of the years of assigned useful life following a decreasing trend .
This is usually used for goods in which the risk of obsolescence is very high, such as computers in an office.
Calculation of the amortization fee
To know what is the annual expense for the depreciation of the assets we must do the following:
- Assign the years of useful life in which the asset will be fully amortized based on the estimated period that will generate income in the company.
- Perform the calculation of the decreasing sum of digits. If an asset has a useful life of 3 years, the first year would be assigned the digit 3, the second year the digit 2 and the third year the digit 1. The total sum digits would be: 3 years + 2 years + 1 year = 6.
- Calculate the amortization expense with the following formula:
Example of increasing amortization
A company has a computer that acquires 01/01/20XX for an amount of 1,000 euros. Due to the speed with which these devices become obsolete, it is considered that their wear will be much greater in the first years of use, so the Management decides to apply the method of decreasing accounting amortization. The useful life estimated by the Chief Financial Officer for this machinery is 4 years.
What is the annual amortization expense?
|Year||Digit number||Amortization fee||Accumulated amortization|
|20X0||4||1,000 / 10 * x 4 = 400||400|
|20X1||3||1,000 / 10 x 3 = 300||700|
|20X2||two||1,000 / 10 x 2 = 200||900|
|20X3||one||1,000 / 10 x 1 = 100||1,000|
* Total digits = 4 + 3 + 2 + 1 = 10