ACC 107
Lesson 11: Depletion of Mineral Resources
Depletion
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Depletion is the systematic allocation of the depletion base of a natural resource over the
period of the natural resource is extracted.
Depletion base is the capitalized cost of the natural resource less its residual value.
Depletion is normally computed using the units-of-production method.
The formula for depletion is:
𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑡ℎ𝑒 𝑤𝑎𝑠𝑡𝑖𝑛𝑔 𝑎𝑠𝑠𝑒𝑡−𝑒𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑟𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒
𝑈𝑛𝑖𝑡𝑠 𝑒𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑡𝑜 𝑏𝑒 𝑒𝑥𝑡𝑟𝑎𝑐𝑡𝑒𝑑
× 𝑈𝑛𝑖𝑡𝑠 𝑒𝑥𝑡𝑟𝑎𝑐𝑡𝑒𝑑 𝑑𝑢𝑟𝑖𝑛𝑔 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟
Account for changes in estimates
When there is a change in the units estimated to be extracted or when the company incurs
additional costs, these are regarded as change in accounting estimate to be handled currently
and prospectively. The company needs to compute for the new depletion rate per unit.
Account for the depreciation of mining equipment
Depreciation of mining equipment
a. Movable tangible equipment includes
those that can be used from one
extracting site to another. Movable
tangible equipment is depreciated
separately over its useful life using
normal depreciation policy.
b. Immovable
tangible
equipment
includes those that cannot be used in
other extracting sites after the
reserves in one site are fully depleted.
Immovable tangible equipment is
depreciated separately over its useful
life or the life of the resource,
whichever is shorter.
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When the useful life of immovable
tangible equipment is shorter than the
economic useful life of the natural
resource, the immovable equipment is
depreciated using the straight-line
method.
When the useful life of immovable
tangible equipment is longer than the
economic useful life of the natural
resource, the immovable equipment is
depreciated using the units-ofproduction method.
FAQs
1. Depletion is an accrual accounting method used to allocate the cost of extracting natural
resources such as timber, minerals, and oil from the earth.
2. Depletion commences when the wasting assets starts to be extracted. In the periods of
no extraction, there is no depletion. Depletion ceases when the natural resource is
derecognized before full consumption whichever is earlier.
Check for Understanding
1. The most common method of computing depletion is production method.
2. Depreciation expense is usually part of cost of goods sold.
3. Information needed to compute a depletion charge per unit includes the estimated total
amount of resources available for removal.