Question

List (a) the similarities and (b) the differences in the accounting treatments of depreciation and cost depletion.

Short answer

Both represent an apportionment of costs under the process of matching costs with revenue. Depletion applies to natural resources, while depreciation applies to plants and equipment.

Step-by-step solution

Step-by-Step SolutionStep 1: Meaning of Depletion

The loss of natural resources as a result of access to them on a regular basis is called depletion.Hence, a company uses it when any kind of registered asset is involved, such as oil, coal, or gravel deposits.

(a) List all similarities in the accounting treatment of depreciation and cost depletion.

Depreciation and cost depletion are accounting concepts that are comparable in the following ways:

1. The asset's cost serves as the starting point for calculating the amount of the periodic charge to operations.
2. The estimated life is determined by the economic or productive life of the item.
3. On the balance sheet, the amount of previous charges to operations is subtracted from the asset's initial cost.
4. When using output techniques to calculate depreciation costs, the calculations are nearly identical to those used to calculate depletion charges.
5. Both reflect a cost apportionment as part of the cost-to-revenue matching process.
6. On the balance sheet, assets that are susceptible to either are classified as such.
7. Depreciation is sometimes calculated using appraisal values, and depletion is calculated using discovery values.
8. In assessing the charge to operations, salvage value is correctly recognized.
9. If the associated asset contributed to the inventory's production, depreciation and depletion might be included in the inventory.
10. If the anticipated productive life utilized in the initial rate computations is revised, the rates may be altered.

(b) Listing all the differences in the accounting treatments of depreciation and cost depletion

Depreciation and cost depletion are two accounting concepts that are not the same:

1. Depletion is nearly always calculated on the basis of production, whereas depreciation is calculated on the basis of time.

2. While several formulae are used to calculate depreciation, only one is employed in any way to calculate depletion.

3. Natural resources are subject to depletion, whereas plants and equipment are subject to depreciation.

4. Depletion relates to the asset's physical depletion or consumption, whereas depreciation refers to the asset's wear and tear and obsolescence.

5. Depreciation is frequently a compulsory deduction under legislation that premise the legitimacy of dividends on cumulative profits, whereas depletion is usually not.

6. Due to the increased uncertainty in predicting the productive life, the computation of the depletion rate is typically significantly less exact than the computation of depreciation rates.

7. A transitory disparity emerges from the timing of depreciation recognized under traditional accounting and under the Internal Revenue Code, resulting in the recording of deferred income taxes. The difference between cost depletion in traditional accounting and percentage depletion under the Internal Revenue Code, on the other hand, is permanent and does not need the recording of deferred income taxes.