Depletion

Depletion refers to the systematic reduction of a natural resource’s quantity as it is extracted or consumed over time.

In accounting, depletion is often used to allocate the cost of extracting natural resources such as minerals, oil, and gas over the resource’s useful life. This process is similar to depreciation, which applies to tangible fixed assets.

There are two primary methods of calculating depletion:

1. Cost Depletion: This method allocates the cost of the resource based on the units extracted during the accounting period relative to the total estimated units of the resource. For example, if a mining company spends $100,000 on a resource and expects to extract 10,000 tons, the cost depletion per ton would be $10 ($100,000 / 10,000 tons).

2. Percentage Depletion: This method allows for a percentage of the gross income from the resource to be deducted as a depletion expense. The percentage varies depending on the type of resource and is set by the IRS. For instance, if a company earns $500,000 from oil extraction and the allowable percentage depletion is 15%, the depletion expense would be $75,000 ($500,000 x 15%).

Depletion impacts both financial statements and tax liability, making it a significant concept in the management of natural resource companies.