Answer
(a) Depreciation and cost depletion are similar in the accounting sense in that:
i. The rates may be changed upon revision of the estimated productive life used in the original rate computations.
ii. The cost of the asset is the starting point from which computation of the amount of the periodic charge to operations is made.
iii. The accumulated total of past charges to operations is deducted from the original cost of the asset on the balance sheet.
iv. The estimated life is based on economic or productive life.
v. When output methods of computing depreciation charges are used, the formulas are essentially the same as those used in computing depletion charges.
vi. Both represent an apportionment of cost under the process of matching costs with revenue.
vii. Assets subject to either are reported in the same classification on the balance sheet.
viii. Appraisal values are sometimes used for depreciation while discovery values are sometimes used for depletion.
ix. Residual value is properly recognized in computing the charge to operations.
x. They may be included in inventory if the related asset contributed to the production of the inventory
.
(b) Depreciation and cost depletion are dissimilar in the accounting sense in that:
i. Depletion applies to natural resources while depreciation applies to plant and equipment.
ii. Many formulas are used in computing depreciation but only one is used to any extent in computing depletion.
iii. Depletion is almost always based on output whereas depreciation is usually based on time.
iv. Depletion refers to the physical exhaustion or consumption of the asset while depreciation refers to the wear, tear, and obsolescence of the asset.
v. The computation of the depletion rate is usually much less precise than the computation of depreciation rates because of the greater uncertainty in estimating the productive life.
vi. Under statutes which base the legality of dividends on accumulated earnings, depreciation is usually a required deduction but depletion is usually not a required deduction.
Work Step by Step
In basic terms depreciation is a reduction in value while cost depletion is a method for allocating the cost of natural resource extraction to the units produced.
