Natural Resources and Depletion

Learning Outcomes

  • Understand the nature of depletable assets

When property is purchased, a journal entry assigns the purchase price to the two assets purchased—the natural resource and the land. If we purchased an ore mine for $650,000 cash and we determined the land value was $50,000 and the Ore Deposit value was $600,000, the entry would be:

JournalPage 101
Date Description Post. Ref. Debit Credit
20–
Apr 15 Land 50,000
Apr 15 Ore Deposits 650,000
Apr 15 Checking Account 650,000

After the purchase, we incurred $300,000 in additional costs to explore and develop the site. This entry would be recorded into the natural resources account, Ore Deposits.

JournalPage 102
Date Description Post. Ref. Debit Credit
20–
Apr 15 Ore Deposits 300,000
Apr 15 Checking Account 300,000
To record costs of exploration and development.

A windmill.On the balance sheet, we classify natural resources as a separate group among noncurrent assets under headings such as “Timber Stands” and “Oil Reserves”. Typically, we record natural resources in the general ledger at their cost of acquisition plus exploration and development costs and then we record an amount called “depletion” that is much like depreciation expense.  Accordingly, on the balance sheet, we report natural resources at total cost less accumulated depletion. (Accumulated depletion is similar to the accumulated depreciation used for plant assets.) When analyzing the financial condition of companies owning natural resources, exercise caution because the historical costs reported for the natural resources may be only a small fraction of their current value.

Depletion is the exhaustion that results from the physical removal of a part of a natural resource. For example; removing copper through mining or cutting timber for a paper company. In each accounting period, the depletion recognized is an estimate of the cost of the natural resource that was removed from its natural setting during the period. To record depletion, debit a Depletion account and credit an Accumulated Depletion account, which is a contra account to the natural resource asset account.

practice question