Accounting Textbooks Boundless Accounting Controlling and Reporting of Real Assets: Property, Plant, Equipment, and Natural Resources Depletion of Assets
Accounting Textbooks Boundless Accounting Controlling and Reporting of Real Assets: Property, Plant, Equipment, and Natural Resources
Accounting Textbooks Boundless Accounting
Accounting Textbooks
Accounting
Concept Version 7
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Depletion Base

The depletion base is the total cost of a natural resource and includes acquisition, exploration, development, and restoration costs.

Learning Objective

  • Differentiate between percentage depletion and cost depletion

Key Points

    • Two methods are used to calculate depletion: percentage and cost.
    • Percentage depletion is calculated by multiplying a certain percentage, specified for each mineral, by your gross income from the property during the year.
    • Cost depletion is computed by (1) estimating the total quantity of mineral or resources acquired,(2) assigning a proportionate amount of the total resource cost to the quantity extracted in the period (total cost of the property/(the quantity extracted in the period/total estimated production).
    • Industries involved in mining, timber, petroleum, and the extraction or use of natural resources are the types of businesses most affected by depletion.

Terms

  • depreciation

    The measurement of the decline in value of assets. Not to be confused with impairment, which is the measurement of the unplanned, extraordinary decline in value of assets.

  • adjusted basis

    The net cost of an asset after adjusting for various tax-related items.

Example

    • This example calculates depletion expense using cost depletion: Big Texas Oil, Co. discovers a large reserve of oil. The company has estimated the oil well will produce 200,000 barrels of oil. The company invests $100,000 to extract the oil, and they extract 10,000 barrels the first year. Therefore, the depletion deduction is $5,000 ($100,000 X 10,000/200,000).

Full Text

Definition of Depletion

Depletion is a method of recording the use of natural resources over time. It is the amount of resources used in each accounting period that is expensed for U.S. tax and financial reporting purposes. Depletion is similar to depreciation, in that it is a cost recovery system for accounting and tax reporting. Industries involved in mining, timber, petroleum, and the extraction or use of natural resources are the types of businesses most affected by depletion. The depletion base is the total cost of the natural resource. It can include costs related to the acquisition of the asset, exploration, development and preparation of the asset for use, and performance of restoration work .

The depletion base for oil reserves includes all the costs incurred to put the asset into use.

Types of costs include acquisition, exploration, development, and restoration costs.

Methods to Calculate Depletion

Percentage Depletion:

To calculate, multiply a certain percentage, specified for each mineral, by your gross income from the property during the tax year. For this purpose, the term "property" means each separate interest business owned in each mineral deposit in each separate tract or parcel of land. Businesses can treat two or more separate interests as one property or as separate properties.

Cost Depletion:

This is an accounting method by which costs of natural resources are allocated to depletion over the period that make up the life of the asset. Cost depletion is computed by (1) estimating the total quantity of mineral or other resources acquired and (2) assigning a proportionate amount of the total resource cost to the quantity extracted in the period.Cost Depletion FormulaAccording to the IRS Newswire, over 50 percent of oil and gas extraction businesses use cost depletion to figure their depletion expense. Mineral property includes oil and gas wells, mines, and other natural deposits (including geothermal deposits). The cost depletion formula for financial reporting purposes is the total investment cost of the property / (the quantity extracted during the period / the property's total estimated production). When calculating cost depletion for tax purposes, multiply the formula by the property's adjusted basis or the property's historical cost subtracted by depletion expense for prior years.

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