What is the Difference Between Depreciation and Depletion?
🆚 Go to Comparative Table 🆚Depreciation and depletion are both accounting techniques used to spread the cost of assets over their useful life, but they are applied to different types of assets and industries. Here are the main differences between depreciation and depletion:
- Asset Type: Depreciation is applied to tangible assets, such as machinery, equipment, vehicles, and buildings, while depletion is used for natural resources, like timber, oil, and minerals.
- Industry: Depreciation is common to almost every industry, whereas depletion is usually used only by energy and natural-resource firms.
- Asset Value Reduction: Depreciation is the deduction of the asset value due to aging, whereas depletion is the actual physical reduction of a company's natural resources.
- Calculation Methods: Depreciation can be calculated using various methods, such as the straight-line method or the accelerated depreciation method. Depletion can be calculated on a cost or percentage basis, and businesses generally must use the method that provides the larger deduction for tax purposes.
In summary, depreciation is an accounting technique used to gradually expense the cost of tangible assets over their useful life, while depletion is used to allocate the cost of extracting natural resources over the period during which they are used.
Comparative Table: Depreciation vs Depletion
Here is a table comparing the differences between depreciation and depletion:
| Feature | Depreciation | Depletion |
|---|---|---|
| Definition | Depreciation is the allocation of the cost of a tangible asset over its useful life. | Depletion is the allocation of the cost of extracting natural resources, such as timber, minerals, and oil, from the earth. |
| Type of Asset | Applies to tangible assets, such as equipment, buildings, and furniture. | Applies to natural resources, such as timber, precious metals, coal, gemstones, and oil. |
| Accounting Method | Depreciation expense is recognized on the income statement, and the accumulated depreciation is recorded on the balance sheet. | Depletion expense is recognized on the income statement, and the accumulated depletion is recorded on the balance sheet. |
| Purpose | Captures the reduction in value of a tangible asset due to aging, wear and tear, and technological advancements. | Captures the reduction in value of natural resources as they are extracted and used. |
| Calculation | Depreciation can be calculated using various methods, such as straight line, declining balance, units of activity, or sum of the years digits. | Depletion can be calculated on a cost or percentage basis, and businesses generally must use whichever provides the larger deduction for tax purposes. |
Both depreciation and depletion are accounting techniques used to gradually expense the cost of assets over their useful lives. However, depreciation is used for tangible assets, while depletion is used for natural resources.
- Devaluation vs Depreciation
- Accounting Depreciation vs Tax Depreciation
- Depreciation vs Provision for Depreciation
- Depreciation vs Amortization
- Depreciation vs Accumulated Depreciation
- Amortization vs Impairment
- SLM vs WDV Method of Depreciation
- Deflation vs Recession
- Expense vs Expenditure
- Ozone Depletion vs Global Warming
- Deficit vs Debt
- Revaluation vs Impairment
- Inventory vs Assets
- Depression vs Recession
- Inflation vs Deflation
- Erosion vs Deposition
- Loan vs Lease
- Decomposition vs Combustion
- Drying vs Dehydration