Accountancy · Ch 7 — Depreciation, Provisions and Reserves
Depletion
Depletion
Depletion
Depletion is the term used specifically for natural resources — assets like mines, quarries, oil wells, and timber tracts. When a business extracts material from such an asset, the quantity of the resource available decreases. This reduction in value, caused by the physical removal of the resource, is called depletion.
Consider a mining company that buys a coal mine for ₹10,00,000. As coal is extracted and sold, the mine itself becomes less valuable — there is less coal left to mine. That loss of value is depletion. It is not about wear and tear (as with a machine) but about the exhaustion of the resource itself.
Depletion and depreciation both represent the expiry of service potential and a reduction in the asset's value. Despite the different causes, they are given the same accounting treatment.
Depletion vs. Depreciation
| Aspect | Depletion | Depreciation |
|---|---|---|
| Context | Natural resources (mines, quarries, oil wells) | Tangible fixed assets (plant, machinery, furniture) |
| Cause | Exhaustion of economic resources through extraction | Usage, wear and tear, or passage of time |
| Result | Erosion in the volume of the natural resource | Reduction in the asset's service potential |
The key difference is the cause: depletion is about the physical exhaustion of a resource, while depreciation is about the usage of an asset. But the end result — a decline in value — is the same, and so the accounting is identical.
Accounting Treatment of Depletion
The journal entry for depletion is exactly the same as for depreciation:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Depreciation A/c (or Depletion A/c) Dr. | xxx | |||
| To Asset A/c (e.g., Coal Mine A/c) | xxx |
Why this entry? The depletion expense is charged to the Profit & Loss Account (through the Depreciation/Depletion account), and the asset's value is reduced directly (or through an accumulated depletion account). This matches the expense of the resource consumed against the revenue it helped generate — the matching principle. …