Depreciation vs Depletion

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Depreciation vs Depletion

By | Feb. 2012
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The concept and practice of depreciation and depletion play an integral part in a company's cash flow and profit or loss statements. Depreciation, according to investopedia is a method of allocating the cost of a tangible asset over its useful life. Depletion is very similar to depreciation with very subtle differences, the first one being what is depreciated verses depleted. All assets (except land) are depreciated but the assets with natural resources are depleted. The methods on how depreciation and depletion are calculated vary as well. Each will be visited in this essay.

Using depreciation, the time based usefulness of an asset of course varies depending on what the asset is. If it is a van for example, its usefulness might be seven years before the van needs replacing, but if it is a building we are talking about, its usefulness may be forty years.

The purpose of depreciation is to match the cost of a productive asset (that has a useful life of more than a year) to the revenues earned from using the asset. Since it is difficult to see a direct link to revenues, the asset’s cost is usually spread over the years in which the asset is used. Depreciation systematically allocates or moves the asset’s cost from the balance sheet to expense on the income statement over the asset’s useful life. In other words, depreciation is an allocation process; it is not a technique for determining the fair market value of the asset.

It is not only current assets that depreciation applies too, but also is applicable to fixed asset as well. Buildings for example lose their value too taking the time scale factor into account. If a building is purchased in 1970 as a newly built structure, its value will have definitely decreased in 2025 by the depreciation rate estimated.

There is one asset that is never depreciated. According to Accounting Tools website;

“Land is not depreciated, since it has an unlimited useful life. If land has a limited useful life, as is the...

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