It is a form of a systematic reduction in value of an asset just like depreciation and amortization. In accounting and finance, depletion is mainly associated with extraction of natural resources i.e. mineral assets. For example – extraction of coal from a mine, extraction of limestone from a quarry, unearthing oil from an oil well, etc.
Such assets are commonly termed as wasting assets since they are eventually used up and will have no remaining value.
Depletion Accounting – It is a form of applying depreciation on such wasting assets, the percentage to be applied is calculated based on the rate at which the natural resource is being used. For example, an oil well would be depreciated based on the rate at which the oil is being extracted from it.
Continuous improvement, innovation, market trends, etc. in the market lead to the production of new and improved assets. It causes a reduction in the monetary value of assets which are currently being used. This whole process of an asset becoming out of date and losing its economic value is called Obsolescence.
- Recommended online courses in accounting from UDEMY
- Recommended online courses in accounting from Coursera
The concept of obsolescence is useful while applying depreciation or evaluating stock (inventory). A fixed asset may become obsolete even before the end of its predicted useful life. While evaluating inventory all obsolete (outdated) items are supposed to be charged to the Income statement.