Depletion

What is 'Depletion'

Depletion is 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.

BREAKING DOWN '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. Percentage Depletion

    A taxable deduction that assigns a set percentage of depletion ...
  2. Cost Depletion

    One of two accounting methods used to allocate the costs of extracting ...
  3. Depreciation, Depletion and Amortization ...

    A method of accounting associated with the acquisition, exploration ...
  4. Natural Capital

    A reference to the stock of natural resources, such as water ...
  5. Earnings Before Interest, Taxes, ...

    An indicator of a company's financial performance calculated ...
  6. Equalization Reserve

    A long-term reserve that an insurance company keeps for the purpose ...
Related Articles
  1. Retirement

    No, Social Security Is Not Being Depleted

    There are a number of reasons why concerns over Social Security depletion have emerged, but there are ways you can prepare for it.
  2. ETFs & Mutual Funds

    Mine For Profits With Natural Resource Sector Funds

    These funds allow everyday investors to get in on the action in this promising sector.
  3. Financial Advisor

    A Key Tip for Making Your Nest Egg Last Longer

    Retirees who don't want to deplete their nest eggs during a bear market should make sure to do the following.
  4. Financial Advisor

    A Key Tip for Making Your Nest Egg Last Longer

    Retirees who don't want to deplete their nest eggs during a bear market should make sure to do the following.
  5. Markets

    A Natural Gas Primer

    Learn why natural gas is playing a larger role in the energy industry.
  6. Personal Finance

    How Does Depreciation Reduce My Tax Bill?

    How the depreciation tax rule can assist real estate investors.
  7. Markets

    Accounting For Differences In Oil And Gas Accounting

    How a company accounts for its expenses affects how its net income and cash flow numbers are reported.
  8. Retirement

    How Much Should Retirees Withdraw From Accounts?

    It can be difficult to determine how much money you can withdraw from your retirement savings each year without depleting your accounts.
  9. Retirement

    Why The 4% Rule No Longer Works For Retirees

    The 4% rule basically states that retirees can withdraw that much from their portfolio each year without depleting the principal too early.
  10. ETFs & Mutual Funds

    Natural Resource Investing

    ETFs and futures are just some of the various investment options available to natural resource investors.
RELATED FAQS
  1. What is the difference between amortization and depreciation?

    Because very few assets last forever, one of the main principles of accrual accounting requires that an asset's cost be proportionally ... Read Answer >>
  2. How does analyzing an oil and gas's financial statements differ from companies in ...

    Learn how financial statements for oil and gas companies appear different from companies in other sectors, and discover how ... Read Answer >>
  3. What is the difference between accrual accounting and cash accounting?

    Understand the differences between the two basic methods of accounting commonly used by businesses: cash accounting and accrual ... Read Answer >>
  4. What are the most common business deductions and expenses for small businesses?

    Learn about some of the most common business tax deductions available to small businesses that can reduce net business expenses. Read Answer >>
  5. What other sectors are most similar to oil & gas drilling?

    Learn about sectors with companies that face similar challenges and rewards as the oil and gas drilling sectors. One example ... Read Answer >>
  6. What is accrual accounting used for in finance?

    Read about the accrual method of accounting, its uses and rules, and why it is considered so important for investors, lenders ... Read Answer >>
Hot Definitions
  1. Poison Pill

    A strategy used by corporations to discourage hostile takeovers. With a poison pill, the target company attempts to make ...
  2. Glass-Steagall Act

    An act the U.S. Congress passed in 1933 as the Banking Act, which prohibited commercial banks from participating in the investment ...
  3. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  4. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  5. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  6. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
Trading Center