COMM321 Chapter Notes - Chapter 11: Matching Principle, Natural Resource, Income Statement
16 Apr 2017
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Depreciation (also known as amortization) is a means of cost allocation. It is not a method of valuation. Allocating the depreciable amount of pp&e to expense (matching principle) in a systematic and rational manner to periods expected to benefit from use of assets. This allocation is generally recognized as depreciation expense. Depletion refers to the cost basis write off of natural resources. Natural resources are characterized by: complete removal of the asset"s physical characteristics. And replacement of the asset only by an act of nature. Determining the depletion base (ch 10: p. 573) Restoration: if oil has been extracted completely, the company has to restore the site back to original format. Depletion calculated using an activity approach (e. g. units of production) Inventory credited when the resource is sold: Where useful life is clearly linked to the resource, tangible assets are amortized using units of production method. = depletion rate x number of units extracted during the year.
