Depreciation, Depletion and Amortization – DD&A

DEFINITION of 'Depreciation, Depletion and Amortization – DD&A'

A method of accounting associated with the acquisition, exploration and development of new oil and natural gas reserves. Depreciation is a means of allocating the cost of a material asset over its useful life, such as operating equipment. Depletion is used to allocate the cost of extracting natural resources from the earth, and is the actual physical depletion of a natural resource by a company. Amortization is the deduction of capital expenses over a specified time period (typically the life of an asset), which in the case of oil and gas, refers to tangible non-drilling costs sustained while developing the reserves.

BREAKING DOWN 'Depreciation, Depletion and Amortization – DD&A'

Two accounting approaches are used by companies involved in the exploration and development of oil and gas: the successful efforts (SE) method, and the full cost (FC) method. Each method handles differently the treatment of specific operating expenses associated with the exploration of new oil and natural gas reserves. DD&A, production expenses and exploration costs are recorded on a company's income statement. DD&A expenses charged to the income statement are determined by the "units-of-production" method.

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