All natural resources like mines, fuel oil, gas and woods are ending by using them. We calculate the depreciation with depletion method for such perishing assets. Under this method, first, we estimate the total value of assets. After this, we calculate the rate of depreciation per unit by dividing the estimated life in the term of production of units.

Formula

Depreciation Rate under Depletion Method

= Original Cost - Scrap Value / Estimated life in terms of production units

Explanation of Formula

A. Original Cost

We can calculate the original cost of resources  by acquiring cost plus cost for making them for production.

B. Estimated Life or Service Life or Production Life

C. Scrap Value

Examples

1. Mr. S purchased a mine for \$ 50,000. Its scrap value is \$ 5000 and its working life is 9 years. 90000 units were expected to be produced during its working life. 5000 units in the first, 12,500 units in the second and 25000 units in the third year were produced. Find out the amount of depreciation in 1st year, 2nd year and 3rd year.

Depreciation per unit = 50,000 - 5,000 / 90000 = \$ 0.50 per unit

2. ABC Company purchases land for \$3,00,000 from which it expects to extract 1,00,000 tons of coal, the estimated residual value is \$20,000, and it mines 8,000 tons of coal in the first year. Calculate the depreciation in first years as per depletion method.

Related Resources :

Fixed Installment Method
Diminishing Balance Method
Insurance Policy Method of Depreciation
Revaluation Method of Depreciation
Machine Hour Rate Method of Depreciation .

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