How to Use the Depletion Method of Depreciation

One of the basic principles of accrual accounting is to match expenses to the period in which they are used. In the case of many fixed assets, they are used over many periods. Their value must be expensed accordingly over those periods. The depletion method of depreciation applies to assets that are valued using an output approach as opposed to a time value approach. Depletion is most applicable to ownership of natural resources such as mines, wells and other limited resources.

Difficulty: Moderately Challenging

Instructions

1. Determine the value of the asset. Depending on the type of asset and the accounting method, there are many ways to do this. If the asset can be easily valued through a third party, that should be used. If the asset is similar in value to another that was recently purchased or sold, that value may be used. In addition, any costs associated with bringing the asset into use, or fees associated with acquiring the asset (such as legal costs or permits), should be included.

2. Estimate the salvage value. This is the value for which the asset can be sold after its useful life.

3. Determine the amount of money and any valuables that can be extracted from the situation.

4. For each period’s depletion expense, find the relative amount extracted compared to the total amount remaining.

5. Using the relative percentage procured, multiply that amount by the book value of the asset. That's the depletion expense.

6. Going forward in subsequent years, follow step 4. That should continue to give you the results from the depletion method of depreciation.

Tips & Warnings

• Depletion is different than depreciation in that the value of the asset can increase in value from year to year, as opposed to most fixed assets which must be recorded at historical cost and can only be written down and never up.
• Don't try to estimate your expenses. Take the time to do accurate accounting if you want to make your business truly successful.