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Depletion Method of Depreciation:

Definition and Explanation:

Depletion method is basically an accounting for natural resources rather that accounting for depreciation. In the case of wasting assets such as mines and quarries, which have to be replaced, depreciation is usually provided for on the depletion unit basis, which means that such a sum is provided each year as represents the expired capital outlay on the basis of output compared with the estimated total contents of the mine etc. Thus if a stone quarry estimated to contain 100,000 tonnes of stone, is acquired for $5,000, the amount of depreciation to be provided will be 5 cents per tonnes of stone raised.

Example:

The SM limited leased a manganese ore mine on June 30th 2002 for a sum of $500,000. It is estimated that total quantity of ore in the mine is 100,000 tonnes. The annual output is as follows:

Year Tonnes
2002 5,000
2003 20,000
2004 16,000
2005 21,000

Required: Using the depletion method of depreciation, show the mine account for the above 4 years.

Solution:

The depreciation will be @ $5 per tonne raised each year:

$500,000 / 100,000 tonnes

= $5.00

Mine Account

2002   $ 2002   $
June 30 Bank 500,000 Dec. 31 Depreciation 25,000
        Balance c/d 475,000
   
   
    500,000     500,000
   
   
2003     2003    
Jan. 1 Balance b/d 475,000 Dec. 31 Depreciation 100,000
        Balance c/d 375,000
   
   
    475,000     475,000
   
   
2004     2004    
Jan. 1 Balance b/d 375,000 Dec. 31 Depreciation 80,000
        Balance c/d 295,000
   
   
    375,000     375,000
   
   
2005     2005    
Jan. 1 Balance b/d 295,000 Dec. 31 Depreciation 105,000
        Balance c/d 190,000
   
   
2006 Balance b/d 190,000      
           
 

More study material from this topic:

Definition, explanation and causes of depreciation
Depreciation is not a matter of valuation but a means of cost allocation
Activity method of depreciation
Straight line method of depreciation
Sum of the years' digits method of depreciation
Reducing balance method
Annuity method
Depreciation fund method or sinking fund method
Insurance policy method
Revaluation method
Depletion method
Machine hour rate, mileage, and global method
Methods of recording depreciation
Reserves
Difference between general reserve and specific reserve
Difference between capital reserve and general reserve
Difference between reserve and reserve fund
Difference between provision and reserve

 

A D V E R T I S E M E N T

 

Financial Accounting Topics


  Introduction to Accounting
 ----------------------------------------------------------------------------
  Transactions and Accounting Equation
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  Analysis of Business Transactions
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  Journal, Ledger and Trial Balance
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  Accounting for Bills of Exchange
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  Special Journals
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  Cash Book
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Bank Reconciliation Statement
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  Final Accounts
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  Work Sheet
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  Capital and Revenue Items
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  Valuation of Inventories
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  Accounts of Non-profit Making Organizations
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  Statement of Cash Flows
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  Accounting Ratios Analysis
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  Depreciation, Provisions and Reserves
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  Accounting Dictionary
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  Financial Calculators
 
 
 
Managerial Accounting Topics

  Financial Statements
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  Cost Volume Profit Relationship
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  Variable Costing System
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  Materials and Inventory Cost Control
----------------------------------------------------------------------------
  Activity Based Costing System
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  Standard Costing and Variance Analysis
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  Balanced Scorecard
----------------------------------------------------------------------------
  Capital Investment Analysis/Capital Budgeting
 

 

 

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