Depreciation, Depletion, and Amortization Explained

30 Mar Depreciation, Depletion, and Amortization Explained

The method used to allot the cost of extracting natural resources in accrual accounting is known as depletion. It is a non-cash expense like amortization and depreciation, which lowers the value of an asset in addition to the scheduled charges to income. It is the gradual exhaustion of natural resource reserves. On the income statement, depreciation on the building appears as part of the cost of ore sold and is carried as part of inventory cost for ore not sold during the period. On the balance sheet, accumulated depreciation on the building appears with the related asset account. A mining company purchased a coal mine on Jan 1 20X5 for $2,800,000.

David has helped thousands of clients improve their accounting and financial systems, create budgets, and minimize their taxes. Journalize the entry to record Core’s purchase of Surety Wireless for journal entry for depletion $280,000 cashplus a $420,000 note payable. Natural resources are physical substances that are converted into inventory when extracted from the ground and, when sold, produce revenues for the firm.

Accounting for Natural Resources:

The journal entry to record depletion includes a a. Debit to Accumulated Depletion. Credit to Depletion Expense. Credit to Accumulated Depreciation.

These estimates include reserves that may be obtained in the future by improved recovery methods now in operation or for which successful testing has been exhibited. Suppose a company pays $50,000,000 for an existing gold mine estimated to contain 1,000,000 ounces of gold. The mine has no salvage value, so the depletable cost of $50,000,000 is divided by 1,000,000 ounces to calculate a per‐unit depletion cost of $50 per ounce. If the company extracts and then sells 100,000 ounces of gold during the year, depletion expense equals $5,000,000. By convention, the credit is made directly to the asset account rather than a contra-asset account. The depletion expense ultimately becomes part of the cost of the oil inventory that eventually will be sold.

BUS103: Introduction to Financial Accounting

Calculate cost depletion based on the actual cost you incur from extracting the resource. The cumulative amount of depletion expense pertaining to the natural resources shown on the balance sheet. The account has a credit balance and will be reported on the balance sheet as a contra asset. In this topic, we are going to learn about Depletion Expenses. After capitalizing natural resource extraction costs, you can easily allocate the expenses across different periods based on the extracted resource. Until that time, when the expense recognition takes place, these costs are usually held on the balance sheet.

Depreciation is a charge for the use of fixed assets, amortization is a charge for the use of intangible assets, and similarly, depletion is charged for the use of natural resources. The depletion expense is recorded in the books for the use of natural resources. When the natural resources are bought the amount paid is capitalized and depending on the usage annually the depletion is charged for the use of the resources. On the balance sheet, we classify natural resources as a separate group among noncurrent assets under headings such as “Timber stands” and “Oil reserves”. Typically, we record natural resources at their cost of acquisition plus exploration and development costs; on the balance sheet, we report them at total cost less accumulated depletion. Instead of using a contra‐asset account to record accumulated depletion, companies may also decrease the balance of natural resources directly.

Depletion Expense Journal Entry

Classify the following adjusting entries as involving prepaid expenses , unearned revenues , accrued expenses , or accrued revenues . To record revenue earned but not yet billed . Which of the following is not true in regard to selling fixed assets? Accumulated Depreciation will be credited. The journal entry is similar to discarding fixed assets. The cash receipt is recorded.