Depletion definition
/What is Depletion?
Depletion is the systematic reduction in the quantity of a natural resource as it is physically removed or consumed. It applies to assets such as oil and gas reserves, mineral deposits, gravel pits, and timber tracts. For example, an oil field becomes depleted as barrels of oil are extracted over time, while a forest is depleted as timber is harvested. In accounting, depletion is also the method used to allocate the cost of acquiring and developing these natural resources to expense as the resource is used. This approach matches the cost of the resource with the revenue generated from its extraction or sale. Depletion is therefore both a physical and an accounting concept.
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.
Related AccountingTools Courses
Depletion 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.