Home » Depreciation, Provisions and Reserves » Depletion Method of Depreciation

# 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