Meaning of depletion
In business, there are tangible assets as well as intangible assets; asset that cannot be seen with physical eyes are referred to as intangible asset while tangible assets are assets that can be seen with physical eyes.
Depletion is a periodic charge to expense for the use of natural resources. Thus, it is used in situations where a company has recorded an asset for such items as oil reserves, coal deposits, or gravel pits. The depletion deduction allows an owner or operator to account for the reduction of a product’s reserves.
Types of depletion
- Percentage depletion To figure percentage depletion, you multiply a certain percentage, specified for each mineral, by your gross income from the property during the tax year.
- Cost depletion Cost depletion is an accounting method by which costs of natural resources are allocated to depletion over the period that make up the life of the asset. Cost depletion is computed by (1) estimating the total quantity of mineral or other resources acquired and (2) assigning a proportionate amount of the total resource cost to the quantity extracted in the period.
Example of Cost Depletion:
Producer X has capitalized costs on Property A of $40,000, originally consisting of the lease bonus, capitalized exploration costs, and some capitalized carrying costs. The lease has been producing for several years and during this time, X has claimed $10,000 of allowable depletion. In 2009, X’s share of production sold was 40,000 barrels and an engineer’s report indicated that 160,000 barrels could be recovered after December 31, 2009.
The calculation of cost depletion for this lease is as follows:
Again the formula Cost depletion = S/(R+S) × AB or AB/(R+S) × S
CD = 40,000/(40,000 + 160,000) × ($40,000 − $10,000)
= 40,000/200,000 × $30,000
= $6,000
Meaning of Amortization
Amortization is the write-off of an asset over its expected period of use, which shifts the asset from the balance sheet to the income statement. It essentially reflects the consumption of an intangible asset over its useful life.
The amortization concept also applies to such items as the discount on notes receivable and deferred charges. The term is also used in lending, where an amortization schedule itemizes the beginning balance of a loan, less the interest and principal due for payment in each period, and the ending loan balance. The amortization schedule shows that a larger proportion of loan payments go toward paying off interest expense early in the term of the loan, with this proportion declining over time as more and more of the loan’s principal balance is paid off.
Accounting for Amortization
The journal entry to record amortization for an intangible asset is:
| Debit | Credit | |
| Amortization expense | xxx | |
| Accumulated amortization | xxx |
Provision for discount on debtors is a charge made against profit in order to provide for an expected loss in the shape of discount that will be calculated on the net amount of debtors after you have deducted all other provisions for doubtful debt
Provisions for discount on creditors-is an addition to the p[fusion_builder_container hundred_percent=”yes” overflow=”visible”][fusion_builder_row][fusion_builder_column type=”1_1″ background_position=”left top” background_color=”” border_size=”” border_color=”” border_style=”solid” spacing=”yes” background_image=”” background_repeat=”no-repeat” padding=”” margin_top=”0px” margin_bottom=”0px” class=”” id=”” animation_type=”” animation_speed=”0.3″ animation_direction=”left” hide_on_mobile=”no” center_content=”no” min_height=”none”][profit to provide for those discount expected to be received on payment of the firms creditors ,this is called provision for discount on creditors
Accounting entries:
Debit: profit and loss account
Credit: provision for discount allowed
Debit : provision for discount received account
Credit: profit and loss account
For more notes; see: http://passnownow.com/classwork-support/[/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]
