Accumulated depletion definition
/What is Accumulated Depletion?
Accumulated depletion is the amount of depletion expense that has built up over time in relation to the use of a natural resource. This amount is paired with the natural resource asset on the balance sheet as a contra account. The net effect of this pairing is that a reduced amount of natural resource asset appears on the balance sheet of the reporting entity.
The amount of accumulated depletion reported by a business will increase over time, as it extracts more resources from its designated asset. Thus, as the accumulated depletion balance increases, the remaining value of the associated natural resource declines.
The typical natural resource that is associated with depletion is a mine.
Analysis of Accumulated Depletion
A business that reports a large proportion of accumulated depletion in relation to the amount of natural resources asset on its books is probably approaching the end of the useful life of the associated resources.
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Sample Presentation of Accumulated Depletion
The following is a sample presentation of a mining company’s accumulated depletion disclosure, which would be included in the footnotes that accompany its financial statements:
As of December 31, the Company has recorded accumulated depletion for its mining properties $37,400,000. This accumulated depletion represents the systematic allocation of the cost of mineral properties over their estimated productive lives, calculated using the unit-of-production method based on the quantity of minerals extracted during the period.
Key Assumptions and Methodology:
Unit-of-production basis. Depletion is calculated using the ratio of the tons extracted during the reporting period to the total proven and probable reserves at the beginning of the period.
Revisions to estimates. Changes in proven and probable reserves or other changes in estimates are accounted for prospectively, impacting the depletion calculation for current and future periods.
Impairment adjustments. If an impairment has been recognized, the net book value of the affected property is adjusted, and depletion is recalculated based on the revised carrying amount.
Impact on Financial Results:
For the fiscal year ending December 31, the Company recorded depletion expense of $4,750,000, which is included in "Cost of Sales" in the Consolidated Statement of Income.
Future Expectations:
The depletion expense for future periods is subject to variations based on changes in production levels, reserve estimates, and any potential impairments or disposals of mining properties.