Why depletion matters to a first-time founder
Resource businesses need to match part of an oil field, mine or timber asset’s recorded cost to the output sold. That affects profit, asset values and tax. Confusing physical exhaustion with the accounting charge can distort unit economics and the remaining value shown on the balance sheet.
Examples of depletion
A quarry has a depletable cost of €900,000 and an estimated 300,000 tonnes of recoverable stone. Using a units-of-production method, depletion is €3 per tonne. Extracting 40,000 tonnes creates a €120,000 depletion amount, subject to the applicable accounting and tax rules.
Common misunderstanding
Accounting depletion is not simply a fall in market value, and it is not usually used for equipment. It allocates the cost of natural resources as extraction occurs. Depreciation normally applies to tangible operating assets, while amortisation commonly applies to certain intangible assets.
When to use it
Use it if the company owns or has capitalised rights to extract natural resources. Establish recoverable quantities, residual value and eligible costs with qualified technical and accounting input, then update estimates when evidence changes. Tax depletion methods can differ materially by jurisdiction from financial reporting.