Depletion

tl;drA systematic allocation of the cost of natural resources over their expected production life as they are extracted or consumed.

Depletion recognizes that natural resource assets like mineral deposits, oil reserves, or timber stands have finite productive capacity that diminishes with use.

Picture a mining company that pays $10 million for rights to extract coal from a site estimated to contain 1 million tons. Using units-of-production depletion, each ton extracted would include $10 of depletion expense. This allocation matches resource costs with production activity and revenues generated.

Managing depletion requires accurate estimates of resource quantities and extraction rates. Companies must regularly update reserve estimates and adjust depletion calculations accordingly.

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