Definition
Accumulated depletion is a contra-asset account recorded on the balance sheet that reflects the total amount of depletion expense that has been allocated over the lifespan of a depletable natural resource. Depletion is an accounting method similar to depreciation and amortization, but it is specifically used for natural resources such as mines, oil fields, and timber.
Examples
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Mining Industry: A mining company extracts minerals from a mine. As the minerals are extracted and sold, the company records a depletion expense. The accumulated depletion account tracks the total depletion taken over time.
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Oil and Gas Industry: An oil company drills wells to extract oil. Each year, the company recognizes a portion of the oil reserve as depleted based on production levels. This is recorded in the accumulated depletion account.
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Timber Industry: A company that owns forest land with timber records depletion each year based on the amount of timber harvested. The cumulative amount of this depletion is recorded in the accumulated depletion account.
Frequently Asked Questions
What is the purpose of accumulated depletion?
Accumulated depletion provides a systematic allocation of the cost of a depletable asset over its useful life. It helps in reflecting the reduction in value of natural resources on the financial statements.
How is depletion expense calculated?
Depletion expense is typically calculated using either the Unit-of-Production method or the percentage depletion method. The Unit-of-Production method divides the cost of the resource by the total estimated units of production and multiplies it by the units extracted during the period.
How is accumulated depletion different from depreciation and amortization?
While all three are methods of allocating the cost of an asset over its useful life, depletion specifically applies to natural resources, depreciation applies to tangible fixed assets like machinery, and amortization applies to intangible assets like patents.
Is accumulated depletion included in gross profit calculations?
No, accumulated depletion is not included in the gross profit calculation. It is considered a non-cash expense and is accounted for separately on the balance sheet and income statement.
How does accumulated depletion affect the balance sheet?
Accumulated depletion is subtracted from the gross value of the depletable asset on the balance sheet. This adjustment reflects the net book value of the natural resource.
Related Terms
- Accumulated Depreciation: A contra-asset account showing the total depreciation taken on tangible fixed assets over time.
- Depreciation: The process of allocating the cost of a tangible fixed asset over its useful life.
- Amortization: The process of allocating the cost of an intangible asset over its useful life.
- Depletion: Allocation of the cost of natural resources over the period they are extracted or utilized.
Online Resources
Suggested Books
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“Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
An in-depth look at accounting principles including depletion, depreciation, and amortization. -
“Advanced Accounting” by Floyd A. Beams, Joseph H. Anthony, Bruce Bettinghaus, and Ken Smith
A comprehensive text that covers advanced accounting topics, including the accounting for natural resources and the calculation of depletion.
Fundamentals of Accumulated Depletion: Accounting Basics Quiz
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