# What Is Percentage Depletion?

Osmand Vitez
Osmand Vitez

Percentage depletion is an accounting method that lowers the value of assets such as fossil fuels, minerals, mining operations, and other land-based items. This method is similar to the use of depreciation or amortization that lowers the book value of physical and nonphysical assets, respectively. The basic method for computing percentage depletion is the units taken from the land divided by the remaining units multiplied by the adjusted cost basis of the asset. The result is an expense amount accountants post into the general ledger that lowers the company’s net income. The amount of depletion also lowers the asset amount until the book value is zero.

Most national accounting standards require companies to record assets at the historical value of the item. In most cases, the historical value represents the initial purchase price plus freight, costs to set up the asset, and costs to test the asset once in place. Companies that use the assets must post a cost for using the asset during normal business operations. Land itself does not necessarily depreciate or go down in value when used by a company. Only the items taken from the land go down in value as the items are no longer on the land for future use.

When posting percentage depletion expenses in the company’s books, accountants must be careful to avoid reducing the land’s historical value. To do this properly, accountants initially record the land’s historical value in one account and the value of the assets to be depleted in another account. Hence, two values are actually on the books that pertain to two separate assets but both in one physical location. The land’s historical value most likely remains the same unless accountants have to revalue the land due to market value changes. Very specific rules apply to the revaluing of assets in a company’s books related to percentage depletion.

Using the basic formula listed previously — units taken from the land divided by the remaining units multiplied by the adjusted cost basis of the asset — is a common monthly expense for percentage depreciation. Accountants must continue to deplete the asset on the land until the dollar value is gone completely from the company’s books. Using monthly depletion expenses should correlate to the use of the items or asset. The expense portion from percentage depletion goes on the income statement, while the accumulated depletion goes on the balance sheet. Accumulated depletion is the figure that lowers the asset value on the balance sheet.

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