Overview
Part 1
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HRM503
Complete week 3 homework and quiz
Part 2 complete discussion
What are the differences between operating losses and investment losses? Include cite references.
Part 3 complete discussion
What is the process for completing an adjusted trial balance?
Part 4 reply to discussion
What is Depletion?
Depletion is an accounting method used to allocate the cost of extracting natural resources like oil, gas, minerals, or timber over time. Just like depreciation applies to machinery and buildings, and amortization to intangible assets, depletion applies to natural resources that get used up.
When is it Used?
Depletion is used when a company owns natural resource properties. For example, a mining company extracting coal or a timber company harvesting trees will use depletion to spread the cost of these natural resources over the period they're being extracted and sold.
There are two types of depletion:
- Cost Depletion – based on the actual cost and how much of the resource has been removed.
- Percentage Depletion – based on a fixed percentage of gross income from the resource (often used for tax purposes).
How Does It Appear on a Balance Sheet?
On the Balance Sheet, depletion reduces the book value of natural resource assets over time. The asset (like a mine or timberland) will appear under Property, Plant, and Equipment (PPE), and the accumulated depletion (like accumulated depreciation) will be subtracted from its original cost to show the net value.
Example:
If a company spends $1,000,000 to buy a coal mine expected to yield 500,000 tons of coal, and it extracts 50,000 tons in one year, it would record $100,000 of depletion expense ($1,000,000 ÷ 500,000 tons × 50,000 tons). This expense also appears on the Income Statement, and the asset’s net value on the Balance Sheet would be reduced accordingly.
Reference:
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2022). Financial accounting (12th ed.). Wiley.
Part 5 reply to discussion
What is the difference between a permanent and temporary account? Provide an example.
Temporary accounts, also referred to as nominal accounts, consist of revenue, expenses, income summary and dividends. Temporary accounts need to be zeroed out at the end of the period. To do this, these accounts are closed out. An income summary is used to close accounts producing the net loss or income. After the income summary is closed, the net income or loss with them be transferred to retained earnings. Permanent accounts on the other hand, also referred to as real accounts, include assets, liabilities and stockholders equity. These accounts are not closed but transfer over to the next period.
Kimmel, P. D., Weygandt, J. J., & Mitchell, J. E. (2021). Financial Accounting: Tools for Business Decision Making (10th ed.). John Wiley &Sons Inc.