Depletion, in financial and accounting contexts, refers to the gradual reduction or exhaustion of an asset’s value over time. It is often associated with natural resources, such as minerals, oil, timber, or other finite assets. Depletion is an accounting method used to allocate the cost of these exhaustible resources over their useful life.

There are two main methods of calculating depletion:

1. **Cost Depletion:**
– Under the cost depletion method, the total cost of the natural resource is spread out over the estimated number of units or volume that can be economically extracted. This method is commonly used for natural resources where the cost per unit of the resource remains relatively constant.

\[ \text{Depletion per Unit} = \frac{\text{Total Cost of Resource}}{\text{Estimated Total Units of Resource}} \]

\[ \text{Depletion Expense} = \text{Depletion per Unit} \times \text{Number of Units Extracted} \]

2. **Percentage Depletion:**
– Percentage depletion is based on a fixed percentage of the gross income derived from the sale of the natural resource. This method does not consider the actual cost incurred but applies a percentage rate to the revenue generated from the sale of the resource.

\[ \text{Depletion Expense} = \text{Percentage Rate} \times \text{Gross Income from Sale of Resource} \]

– It’s important to note that the percentage depletion method is subject to limitations and restrictions set by tax laws.

Depletion is commonly used in industries such as mining, oil and gas extraction, and forestry, where companies exploit natural resources that have a limited supply. The depletion expense is recorded on the income statement over the period during which the resources are extracted or used.

It’s crucial to distinguish depletion from depreciation and amortization. While depletion is specifically associated with the depletion of natural resources, depreciation pertains to the allocation of the cost of tangible assets like machinery and buildings, and amortization relates to the allocation of the cost of intangible assets like patents and copyrights.

Depletion is a concept used for financial reporting and taxation purposes to reflect the reduction in the value of natural resources as they are exploited and removed from the asset base. Proper accounting for depletion helps companies accurately reflect their costs and income associated with the use of finite resources.