Difference Between Depreciation and Depletion

Depreciation vs Depletion

Depreciation and Depletion both have similar accounting concepts but are used for different asset / company types. Both are used to reduce the asset value, as the asset is used over time. These are non-cash deductions from income, and they do not take time value of money into account.

What is Depreciation?

Depreciation is the accounting term used for assets such as buildings, furniture and fittings, equipment etc. Companies use this to record the diminishing value of their assets as they are used in the business from the time of purchase of such assets. Hence cost is allocated periodically as value lost due to usage (as expense affecting the business’s net income) and the declining value of assets is recorded (affecting the value of business). Different methods exist in calculating the depreciation amount and these are different depending on the asset type. The depreciation is calculated from the time an asset is used / placed for service and the depreciation is recorded periodically. Depreciation is calculated taking the cost of the asset, the expected useful life of the asset, residual value of the asset and percentage where necessary. Depreciation is not taken into account once the full cost of the asset is recovered / the asset is no longer in the company’s possession (i.e. sold, stolen and fully depreciated). Two main ways exist in calculating depreciation and they are the straight line (which allows deducting the same amount each year over the life of the asset) and reducing balance method / declining balance method (which provides for a higher charge in the first year and reducing amount throughout the asset life).

What is Depletion?

Depletion is an accounting concept which is used mostly in mining, timber, petroleum or other similar industries. Being similar to depreciation, depletion allows accounting for the reduction of the resource’s reserve. There are two main types of depletion calculation: cost depletion (where cost of the resource allocated over the period) and percentage depletion (the percentage of the property’s gross income where percentage is specified for each mineral).

What is the difference between Depreciation and Depletion?

Though both have similar concepts, difference between depreciation and depletion exist as mentioned below.

1. Depreciation is on tangible assets where as depletion is on non-renewable resources.

2. Depreciation is the deduction of the asset value due to aging, whereas depletion is the actual physical reduction of the company’s natural resources (accounting for consumption).

Conclusion

Both methods are used to calculate the asset / resource’s periodic value. Depending on the company and its resource / asset in use, these methods reduce the value of the asset / resource which is taken into account. Different accounting standards are in place to guide companies in accounting for both depreciation and depletion. E.g. computer equipment in a company would be considered for depreciation from the point of time of it in use. Whereas in the oil company, its resource will have depletion amount being calculated as it is used. Hence, these methods help the company to record the asset / resource’s value as it reduces due to the usage, and hence, help to understand its value at a given time.