Depletion Expense Journal Entry

Overview

Depletion is the allocation of the cost of the natural resource to the unites extracted. Similar to depreciation, the journal entry for depletion includes the depletion expense on the income statement and the accumulated depletion on the balance sheet.

While the depreciation expense represents the deterioration of the plant assets, the depletion expense represents the exhaustion of a natural resource. This is why the way that the company determines the depletion expense is similar to that of the depreciation expense.

Depletion expense journal entry

Extracted and sold

The company can make the depletion expense journal entry by debiting the depletion expense account and crediting the accumulated depletion account.

Account	Debit	Credit
Depletion expense	$$$
Accumulated depletion		$$$

The accumulated depletion is a contra account to the natural resource account (e.g. coal deposits account). It is a balance sheet item, in which its normal balance is on the credit side. On the other hand, depletion expense is an income statement item that represents the exhaustion of the natural resource.

The above journal entry is made for the accounting period where the company has extracted and sold all portion of natural resource (e.g. coal) that they have extracted.

Sometimes, the company has not sold all the natural resource in the year it is extracted. In this case, it needs to record the unsold portion as the inventory and the depletion expense will be recorded in the period it is sold.

Unsold part of natural resource

Likewise, the company can make the journal entry for depletion expense and the unsold part of natural resource as below:

Account	Debit	Credit
Depletion expense	$$$
Inventory	$$$
Accumulated depletion		$$$

Depletion expense example

For example, the company ABC purchases a coal mine that costs $10 million which is estimated to contain 5,000,000 tons of coal. The mine is estimated to has a salvage value of $500,000 at the end of its life.

The company has extracted 450,000 tons of coal in the first year.

What is the journal entry for depletion expense in the first year?

• if the company have sold all the 450,000 tons of coals in the first year
• if only 400,000 tons have been sold in the first year

Solution:

With the information above, the depletion cost of the coal mine can be determined as below:

The depletion cost of the coal mine = (10,000,000 – 500,000)/5,000,000 = $1.9 per ton

All the extracted coal have been sold in the first year

If the company ABC have sold all the 450,000 tons of coals in the first year, it can make the journal entry for depletion expense of $855,000 (450,000 x 1.9) of below:

Account	Debit	Credit
Depletion expense	855,000
Accumulated depletion		855,000

Only 400,000 tons have been sold in the first year

If only 400,000 tons have been sold, the company ABC can make the journal entry for depletion expense of $760,000 (400,000 x 1.9) and records the $95,000 (50,000 x 1.9) unsold portion as inventory in the first year as below:

Account	Debit	Credit
Depletion expense	760,000
Inventory	95,000
Accumulated depletion		855,000