How to account for natural resources, including depletion (4 of 5)

How to account for natural resources, including depletion (4 of 5)



the next section we're going to look at is how to account for natural resources including depletion now the first thing we can see is that natural resources are simply assets that come from the earth and common examples minerals gas oil timber and the cost is very simple it's what we paid to acquire the asset with the depletion that's simply the process of allocating that initial cost to expense over time so as we have used up this resource we're going to record in the books the expensing of that cost over time and as it shows at the bottom depletion expense is calculated like units of production depreciation that we looked at earlier the only difference really is that with natural resources as opposed to some of the tangible assets we do not have that residual value that we need to factor in here we can see the very simple equation that we use to calculate depletion expense per unit and all we have to do is start off with our initial cost and then divide that by its useful life in units so not in years and if we do that we get depletion expense per unit we can plug in some example figures here we had an initial cost of a million dollars let's say this was a goldmine and it was going to give us we estimated 2,000 ounces of gold well we just take the million divided by the 2,000 and we get 500 dollars per ounce and that would be our depletion expense per unit so if we move on with this example where we had calculated using the million dollars divided by the two thousand units so we had five hundred dollars per unit or per ounce well if in year one we actually mined 1000 of those ounces that would give us half a million dollars of depletion expense for the year and all we have to do is debit depletion expense and then we credit accumulated depletion

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