Depletion

AAA

DEFINITION of 'Depletion'

An accrual accounting method that companies use to allocate the cost of extracting natural resources such as timber, minerals and oil from the earth. Depletion is calculated for tax-deduction and bookkeeping purposes. Unlike depreciation and amortization, which mainly describe the deduction of expenses due to the aging of equipment and property, depletion is the actual physical depletion of natural resources by companies.

INVESTOPEDIA EXPLAINS 'Depletion'

Entities that meet the IRS definition of having an economic interest in the property are eligible to claim deductions for depletion. For accounting and financial reporting purposes, depletion is meant to assist in accurately identifying the value of the assets on the balance sheet.


There are two types of depletion: percentage depletion and cost depletion. The IRS requires the cost method to be used with timber. It requires the method that yields the highest deduction to be used with mineral property, which it defines as oil and gas wells, mines, and other natural deposits (including geothermal deposits).


Cost depletion is calculated by taking the property's basis, total recoverable units and number of units sold into account. Percentage depletion looks at the property's gross income and taxable income limit.

RELATED TERMS
  1. Amortization

    1. The paying off of debt in regular installments over a period ...
  2. Cost Depletion

    One of two accounting methods used to allocate the costs of extracting ...
  3. Accounting

    The systematic and comprehensive recording of financial transactions ...
  4. Generally Accepted Accounting Principles ...

    The common set of accounting principles, standards and procedures ...
  5. Fundamental Analysis

    A method of evaluating a security that entails attempting to ...
  6. Depreciation

    1. A method of allocating the cost of a tangible asset over its ...
Related Articles
  1. An Introduction To Depreciation
    Active Trading

    An Introduction To Depreciation

  2. Accounting For Differences In Oil And ...
    Fundamental Analysis

    Accounting For Differences In Oil And ...

  3. Understanding Oil Industry Terminology
    Budgeting

    Understanding Oil Industry Terminology

  4. What is the difference between amortization ...
    Investing

    What is the difference between amortization ...

comments powered by Disqus
Hot Definitions
  1. Effective Annual Interest Rate

    An investment's annual rate of interest when compounding occurs more often than once a year. Calculated as the following: ...
  2. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  3. Odious Debt

    Money borrowed by one country from another country and then misappropriated by national rulers. A nation's debt becomes odious ...
  4. Takeover

    A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the ...
  5. Harvest Strategy

    A strategy in which investment in a particular line of business is reduced or eliminated because the revenue brought in by ...
  6. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
Trading Center