Accounting for the use of natural resources such as timber, oil, and metal ores is known as depletion. It is the entry for recording annual depletion is to debit depletion expense and credit accumulated depletion. The costs for these natural resources is accounted for as fixed assets. Then the period cost (depletion) is based on the relationship of the total amount of the natural resource to the amount removed during the period.
For example, assume that a forest has been purchased to be used to provide timber for a lumber mill. The cost of purchasing this asset was $150,000. There are a total 1,500 acres of timber. During the current accounting period, 100 acres of timber were cut.
The calculation to arrive at the $10,000 figure is
100 acres/1500 acres = 1/15; 1/15 x $150,000 = $10,000.
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