Depletion definition
/What is Depletion?
Depletion is the actual physical reduction of a natural resource. For example, an oil field is depleted as oil is extracted from it over time. Depletion is commonly associated with all types of mining, as well as petroleum drilling and timberland usage.
Example of Depletion
A mining company buys a quarry for $1,000,000 and expects to extract 500,000 tons of minerals from it. Based on this information, the expected depletion expense per ton will be $1,000,000 ÷ 500,000 tons = $2 per ton.
If the company then extracts 10,000 tons of minerals in its first year of operations, then its depletion expense for that year will be 10,000 tons multiplied by $2, or $20,000.
Accounting for Depletion
The depletion concept is used in accounting to charge the costs of natural resource extraction to expense as those resources are being used. Depletion can be considered a variable cost , since it is closely linked to the rate at which resources are consumed. This varies from the fixed cost treatment that is accorded to depreciation and amortization , since these types of expensing mechanisms do not vary with activity levels.
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FAQs
How Does Depletion Differ from Depreciation?
Depletion and depreciation are both methods of cost allocation, but they apply to different types of assets. Depletion is used for natural resources such as minerals, oil, and timber, reflecting their gradual exhaustion. In contrast, depreciation applies to tangible fixed assets like machinery and buildings, accounting for their wear and tear over time.
