depletion

Examples of depletion in the following topics:

• Depletion Base

  • This example calculates depletion expense using cost depletion: Big Texas Oil, Co. discovers a large reserve of oil.
  • Therefore, the depletion deduction is $5,000 ($100,000 X 10,000/200,000).
  • Depletion is a method of recording the use of natural resources over time.
  • The depletion base is the total cost of the natural resource.
  • Cost depletion is computed by (1) estimating the total quantity of mineral or other resources acquired and (2) assigning a proportionate amount of the total resource cost to the quantity extracted in the period.Cost Depletion FormulaAccording to the IRS Newswire, over 50 percent of oil and gas extraction businesses use cost depletion to figure their depletion expense.

• Special Considerations for Acquisition and Depletion of Natural Resources

  • To record depletion, debit a depletion account and credit an accumulated depletion account, which is a contra account to the natural resource asset account.
  • If all of the resource is sold, expense all of the depletion and removal costs.
  • To compute depletion charges, companies usually use the units-of-production method.
  • This calculation provides a per-unit depletion cost.
  • Define a natural resource and how to properly account for its depletion

• Recoverable Reserves

  • This cost is subject to depletion --the company has estimated the oil well will produce 200,000 barrels of oil.
  • Depletion expense allows a business to account for the reduction in value of natural reserves.
  • Two methods are available to calculate depletion: the cost and percentage method.
  • Cost depletion is the most commonly used by oil and gas companies.
  • The amount of recoverable reserves are used to compute an asset's depletion.

• Resource Cost Write-Off

  • Assets that are natural resources, which are used throughout the course of business, are subject to periodic depletion.
  • When the asset has been depleted to a value of zero or its value has dropped to less than its salvage value, the asset's remaining book value, as calculated by the original historical cost minus the depletion of prior years, is removed from the balance sheet through a write-off.
  • The journal entry will credit (decrease) the asset's account balance (equal to its historical cost) and debit (decrease) the balance in the accumulated depletion account.
  • The decrease in the asset and accumulated depletion accounts reduces the balance to zero and removes the account from the balance sheet.
  • A write-off journal entry removes an asset not in use and its related contra account (accumulated depletion) from the balance sheet.

• Expense Recognition

  • The International Accounting Standards Board defines expenses as follows: "Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants. "