What is Depletion?

Depletion is an accrual accounting teﷺchnique used to allocate the cost of extracting natural resources such as timber, 🦩minerals, and oil from the earth. 

Like 澳洲幸运5开奖号码历史查询:depreciation and 澳洲幸运5开奖号码历史查询:amortization, depletion is a 澳洲幸运5开奖号码历史查询:non-cash expense that lowers the cost value of an asset incrementally through scheduled charges to income. Where depletion differs is that it refers to the gradual exhaustion of natural resource reserves, as opposed to the wearing out of depreciable assets or aging life of 澳洲幸运5开奖号码历史查询:intangibles.

How Depletion Works

Depletion for accounting and financial reporting purposes is meant to assist in accurately identifying the value of the assets on the 澳洲幸运5开奖号码历史查询:balance sheet and recording expenses in the appropriate time period on the 澳洲幸运5开奖号码历史查询:income statement.

When the costs associated with natural resource extraction have been 澳洲幸运5开奖号码历史查询:capitalized, the expenses are systematically allocated across different time periods based upon the resources extraไcted. The costs are held on the balance sheet until expense recogniti꧑on occurs.

Recording Depletion

To calculate what expenses need to be spread out for the use of natural resources, each different phase of production must be taken into consideration. The depletion base is the 澳洲幸运5开奖号码历史查询:capitalized costs depleted across multiple 澳洲幸运5开奖号码历史查询:accounting periods. There are four main f꧒actors that affect the depletion base:

• Acquisition: Costs associated with purchasing or leasing the property rights to land that the company believes has natural resources.
• Exploration: Expenses linked to digging under the land that was leased or bought.
• Development: The costs necessary to prepare the land for natural resource extraction, such as tunneling or developing wells.
• Restoration: Expenses associated with restoring the land to its original condition after completion.

Percentage Depletion Method

One method of calculating depletion expense is the 澳洲幸运5开奖号码历史查询:percentage depletion method. It assigns a fixed percentage to gross revenue—sales minus costs—to allocate expenses. For example, if $10 million 📖of oil is extracted and the fixed percentage is 15%, $1.5 million of capitalized costs to extract the natural resource are depleted.

The perce🍸ntage depletion method requires a lot of estimates and is, therefore, not a heavily relied upon or accဣepted method of depletion.

Cost Depletion Method

The second method of calculating depletion is the 澳洲幸运5开奖号码历史查询:cost depletion method. Cost depletion is calculated by taking the property's basis, total 澳洲幸运5开奖号码历史查询:recoverable reserves and number of units sold into account. The property’s basis𝓡 is distributed among the totalꦓ number of recoverable units. As natural resources are extracted, they are counted and taken out from the property’s basis.

For example, the capitalized costs of $1 million yields 500,000 barrels of oil. In the first year, if 100,000 barrels of oil are extracted, the depletion expense f🌠or the period is $200,000 (100𒈔,000 barrels * ($1,000,000 / 500,000 barrels)

Reporting Requirements

The 澳洲幸运5开奖号码历史查询:Internal Revenue Service (IRS) requires the cost method to be used with timber. It requires the method that yields the highest deduction to be used with mineral property, which it defines as oil and gas wells, mines, and other natural deposits, including geothermal deposits.

Because the percentage depletion looks at the property's 澳洲幸运5开奖号码历史查询:gross income and 澳洲幸运5开奖号码历史查询:taxable income limit, as opposed to the amount of the natural resource extracted, it is not an acceptable reporting method for certaiꦕn natural resources.