The systematic allocation of the cost of natural resources (minerals, oil, gas, timber) as they are extracted or consumed over time.
Depletion is to natural resources what depreciation is to fixed assets and amortization is to intangible assets. It allocates the cost of acquiring and developing natural resources over the units extracted. The most common method is units-of-production: total cost is divided by estimated recoverable units, then multiplied by units actually extracted in the period. Costs subject to depletion include acquisition cost (mining rights, lease), exploration costs (geological surveys, test drilling), and development costs (shafts, wells, roads). Depletion is particularly relevant for mining companies, oil & gas producers, quarry operators, and timber companies. In India, depletion is covered under Ind AS 16 and relevant mining regulations.
A mining company acquires mineral rights for ₹5,00,00,000 with estimated 10,00,000 tonnes of ore. Depletion rate: ₹500/tonne. In Year 1, 1,50,000 tonnes extracted. Depletion expense: 1,50,000 × ₹500 = ₹7,50,00,000. After Year 1, ₹4,25,00,000 cost remains on the balance sheet.
Ensures accurate financial reporting and record-keeping
Helps maintain regulatory and tax compliance
Enables better-informed business decisions
Improves operational efficiency and cash flow management
All three allocate asset cost over time. Depreciation applies to tangible fixed assets (machinery, buildings). Amortization applies to intangible assets (patents, software). Depletion applies to natural resources (mines, oil wells, forests). The concept is identical — only the asset type differs.
Debit: Depletion Expense (or Inventory, if the resource is processed before sale), Credit: Accumulated Depletion (contra-asset account). The accumulated depletion reduces the carrying value of the natural resource on the balance sheet.
The systematic allocation of the cost of a tangible asset over its useful life, representing the decline in value due to wear, use, or obsolescence.
The gradual write-off of the cost of an intangible asset (like patents, software, or goodwill) over its useful life, or the repayment of a loan in installments.
Long-term tangible assets owned by a business that are used in operations and not intended for sale, such as land, buildings, machinery, vehicles, and equipment.
The ongoing costs incurred by a business in its day-to-day operations, including rent, salaries, utilities, marketing, and administrative expenses.
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