Depletion
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Depletion
The natural resources or wasting assets are recorded in the books at their acquisition cost. As the resource is extracted (e.g., mineral deposits, oil and gas resources, timber stands) the value of the asset is reduced. This reduction in the valuation of the asset or its expiration of the cost is called depletion. Depletion is the process of allocating the cost of an investment in the natural resources through systematic charges to income as the supply of the physical asset is reduced through operations, after making provisions for the residual value of the land remaining after the valuable resources is exhausted. As with depreciable assets, the cost basis for depletion must be determined. The acquisition cost includes the purchase price plus any development or exploratory cost incurred. A provision is made for the salvage or residual value after the natural resources is removed. In general, after the minerals, oil, timber etc. have been removed the expected value of the land constitutions the residual value.
The most common basis for recording depletion is unit of production or output basis (also called production method). In this method the depletion rate is determined by dividing the depreciation cost of the asset by the best available number or recoverable units. Normally the estimate may be made through engineering or geological estimates.
Depletion and Depreciation: Depletion differs from depreciation in that the depletion charges are related to the physical exhaustion of an asset and the actual production is directly included in the inventory costs. On the other hand, depreciation recognizes the service exhaustion of an asset and is allocated to periodic income except for depreciation related to manufacturing facilities which is included in inventory costs on an allocated basis.
________________________________________Rs. Rs.
(i) When the natural resource is extracted
Depletion Expense Account______________Dr. 30,000
To Accumulated Depletion Account_________________30,000
(ii) For Unsold units
Inventory Accounts_____________________Dr. 10,000
To Depletion Expense Account____________________10,000
Alternatively
Depletion Expenses Account_____________Dr. 30,000
To Natural Resources___________________________30,000
Inventory Account______________________Dr. 10,000
To Depletion Expenses__________________________10,000
In the balance sheet the natural resources might be shown in either of the following ways: (1) At the acquisition cost in the asset until the asset is completely exhausted.
(2) The aggregate amount of the units extracted is the accumulated depreciation account on the liabilities side.
(3) Inventories, if any, on the asset side with the amount of unsold units.
(A) The natural resources would be shown at its undepleted cost in the asset side, that is, acquisition cost minus depletion expense.
(B) Inventories, if any, would be shown in the asset side.
(C) Accumulated depreciation would not be raised.
It would be a good practice if the total number of estimated recoverable units of disclosed in the footnote to the balance sheet.
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The most common basis for recording depletion is unit of production or output basis (also called production method). In this method the depletion rate is determined by dividing the depreciation cost of the asset by the best available number or recoverable units. Normally the estimate may be made through engineering or geological estimates.
Depletion and Depreciation: Depletion differs from depreciation in that the depletion charges are related to the physical exhaustion of an asset and the actual production is directly included in the inventory costs. On the other hand, depreciation recognizes the service exhaustion of an asset and is allocated to periodic income except for depreciation related to manufacturing facilities which is included in inventory costs on an allocated basis.
Accounting Entries
The following journal entries are made:________________________________________Rs. Rs.
(i) When the natural resource is extracted
Depletion Expense Account______________Dr. 30,000
To Accumulated Depletion Account_________________30,000
(ii) For Unsold units
Inventory Accounts_____________________Dr. 10,000
To Depletion Expense Account____________________10,000
Alternatively
Depletion Expenses Account_____________Dr. 30,000
To Natural Resources___________________________30,000
Inventory Account______________________Dr. 10,000
To Depletion Expenses__________________________10,000
In the balance sheet the natural resources might be shown in either of the following ways: (1) At the acquisition cost in the asset until the asset is completely exhausted.
(2) The aggregate amount of the units extracted is the accumulated depreciation account on the liabilities side.
(3) Inventories, if any, on the asset side with the amount of unsold units.
(A) The natural resources would be shown at its undepleted cost in the asset side, that is, acquisition cost minus depletion expense.
(B) Inventories, if any, would be shown in the asset side.
(C) Accumulated depreciation would not be raised.
It would be a good practice if the total number of estimated recoverable units of disclosed in the footnote to the balance sheet.
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