What is Depletion Expense?

Depletion expense is a charge against profits for the use of natural resources. The depletion concept is most commonly used in the mining, timber, and oil and gas industries, where exploration and development costs are capitalized, and depletion is needed as a logical system for charging these costs to expense.

How to Calculate Depletion Expense

The calculation of depletion expense is to multiply the number of consumed units of the natural resource by the cost per unit. The cost per unit is derived by aggregating the total cost to purchase, explore for, and develop the natural resource, divided by the total number of units expected to be extracted.

Example of Depletion Expense

A coal mining firm has purchased mineral rights for $10,000,000 and spent an additional $2,000,000 to develop the property. The firm expects to extract 500,000 tons of coal. Based on this information, the depletion rate will be $12,000,000 divided by 500,000 tons, or $24 per ton. In the most recent period, the company extracted 1,000 tons, for which the related depletion expense is $24,000.

Depletion Expense vs. Depreciation Expense

Depletion expense is a charge against profits for the use of natural resources. This concept differs from depreciation, where the calculation is based on a fixed usage period. For example, the depreciation charge for an asset that cost $50,000 and which has a useful life of five years is $10,000 per year, even if the asset is not used during that period. With depletion, there is no fixed usage period; instead, the usage level could vary substantially from period to period.