The company can make the depletion expense journal entry by debiting the depletion expense account and crediting the accumulated depletion account. The cost depletion method focuses on gradual reduction depletion journal entry across the estimated life of the asset. The journal entry to record the purchase of a fixed asset (assuming that a note payable is used for financing and not a short-term account payable) is shown here.

Continuing on our example, let’s assume the project has a residual value of $ 1.0 million. When analyzing depreciation, accountants are required to make a supportable estimate of an asset’s useful life and its salvage value. However, over the depreciable life of the asset, the total depreciation expense taken will be the same, no matter which method the entity chooses. For example, in the current example both straight-line and double-declining-balance depreciation will provide a total depreciation expense of $48,000 over its five-year depreciable life.

How to Report Percentage Depletion on Financial Statements

Compared with the straight-line method, it doubles the amount of depreciation expense you can take in the first year. Like double declining, sum-of-the-years is best used with assets that lose more of their value early in their useful life. For instance, let’s assume that a company purchases an oil field for $2,000,000. They estimate the oil field to have 1,000,000 gallons of oil reserves on the property. As a side note, there often is a difference in useful lives for assets when following GAAP versus the guidelines for depreciation under federal tax law, as enforced by the Internal Revenue Service (IRS).

  • In this case, the asset account stays recorded at the historical value but is offset on the balance sheet by accumulated depreciation.
  • For example, the company ABC purchases a coal mine that costs $10 million which is estimated to contain 5,000,000 tons of coal.
  • Mary Girsch-Bock is the expert on accounting software and payroll software for The Ascent.
  • If so desired, the company could continue to use the asset beyond the original estimated economic life.
  • When the entry is posted to the accounts, Depreciation Expense has increased and Accumulated Depreciation has increased.

Each year, the accumulated depreciation balance increases by $9,600, and the press’s book value decreases by the same $9,600. At the end of five years, the asset will have a book value of $10,000, which is calculated by subtracting the accumulated depreciation of $48,000 (5 × $9,600) from the cost of $58,000. In this section, we concentrate on the major characteristics of determining capitalized costs and some of the options for allocating these costs on an annual basis using the depreciation process. In the determination of capitalized costs, we do not consider just the initial cost of the asset; instead, we determine all of the costs necessary to place the asset into service. The acquired mine has an estimated capacity of 20,00,000 tons of coal; the salvage value at the end is zero.


The reason these expenses are separately categorized lies on the fact that there is a significant amount of resources that surface from the ground. It includes purchase price, or the cost of the resource, cost of rights, or anything else required to prepare areas that are responsible for extraction of these resources. It is important to note that all expenses incurred for the construction of the building are added to the cost of the building. These include purchasing construction materials, wages for workers, engineering, etc. When provision for depreciation/accumulated depreciation is maintained.

depletion journal entry

Accordingly, on the balance sheet, we report natural resources at total cost less accumulated depletion. Plant assets and natural resources are tangible assets used by a company to produce revenues. On the income statement, depreciation expense is recorded for plant assets and depletion expense is recorded for natural resources. On the balance sheet, accumulated depreciation appears with the related plant asset account and accumulated depletion appears with the related natural resource account.

Natural Resources and Depletion

The expense recognition principle that requires that the cost of the asset be allocated over the asset’s useful life is the process of depreciation. For example, if we buy a delivery truck to use for the next five years, we would allocate the cost and record depreciation expense across the entire five-year period. He estimates that he can use this machine for five years or 100,000 presses, and that the machine will only be worth $1,000 at the end of its life. He also estimates that he will make 20,000 clothing items in year one and 30,000 clothing items in year two. Determine Liam’s depreciation costs for his first two years of business under straight-line, units-of-production, and double-declining-balance methods.

  • When provision for depreciation/accumulated depreciation is maintained.
  • A common method is to allocate depreciation expense based on the number of months the asset is owned in a year.
  • Figuring percentage depletion accurately can help a small business save money, accurately report the figure on financial statements and stay on the right side of IRS rules.
  • Finally, in terms of allocating the costs, there are alternatives that are available to the company.
  • The Depletion method of depreciation is a cost allocation method that works for depleting natural resources.

Depreciation is a charge for the use of fixed assets, amortization is a charge for the use of intangible assets, and similarly, depletion is charged for the use of natural resources. The depletion expense is recorded in the books for the use of natural resources. When the natural resources are bought the amount paid is capitalized and depending on the usage annually the depletion is charged for the use of the resources.

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