Depletion

Definition

Depletion is the systematic allocation of the cost of natural resources over their useful life. It accounts for the reduction of available resources due to extraction or usage.

5 Must Know Facts For Your Next Test

1. Depletion expense is calculated using units-of-production method.
2. Natural resources subject to depletion include oil, minerals, and timber.
3. The depletion base includes acquisition costs, exploration costs, and development costs.
4. Depletion reduces the book value of the resource on the balance sheet.
5. Companies must estimate recoverable units to calculate annual depletion.

Review Questions

• What method is primarily used to calculate depletion expense?
• Which types of assets are typically subject to depletion?
• What components make up the depletion base?

Related terms

Depreciation:

Allocation of tangible asset cost over its useful life.

Amortization:

Allocation of intangible asset cost over its useful life.

Units-of-Production Method: A depreciation method where expense is based on actual usage.