Explain the accounting procedures for depletion of natural resources.
Explain the accounting procedures for depletion of natural resources.
Depletion:
It refers to the process of proportionately distributing the cost of the extracting natural resources such as coal, mines, and petroleum from the earth to the number of units extracted.
The following is the formula to calculate the depletion expense:
Depletion Cost per Unit = (Cost of the asset — Residual value) / Estimated Number of Units
Depletion Expense = Depletion Cost per Unit x Number of units Extracted and Sold
When the natural resources are depleted the company will obtain inventory. Because, depletion is necessary to obtain the inventory, the depletion computed during the year is added to the cost of the inventory, not expensed in that year. This is the reason that the depletion does not appear in the income statement.
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