Depletion expense is a charge against profits for the use of natural resources. The calculation of the expense is to multiply the number of consumed units of the natural resources by the cost per unit. The cost per unit is derived by aggregating the total cost to purchase, explore for, and develop the natural resources, divided by the total number of units expected to be extracted.
For example, a coal mining firm has purchased mineral rights for $10,000,000 and spent an additional $2,000,000 to develop the property. The firm expects to extract 500,000 tons of coal. Based on this information, the depletion rate will be $12,000,000 divided by 500,000 tons, or $24 per ton. In the most recent period, the company extracted 1,000 tons, for which the related depletion expense is $24,000.
The depletion concept is most commonly used in the mining, timber, and oil and gas industries, where exploration and development costs are capitalized, and depletion is needed as a logical system for charging these costs to expense.