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What is difference between depreciation and depletion
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What is difference between depreciation and depletion
Depreciation is related to fixed assets like tangible or intangible but depletion is related with natural resources
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What is difference between depreciation and depletion
Depreciation vs Depletion: Explained
Depreciation and depletion are two terms used in accounting and finance to describe the reduction in value of assets over time. While they may seem similar, there are some significant differences between the two concepts.
What is Depreciation?
Depreciation is the reduction in value of tangible assets such as buildings, machinery and equipment over time due to wear and tear, obsolescence, or other factors. It is a non-cash expense that is recorded on the income statement to reflect the decrease in the asset's value.
Types of Depreciation
- Straight-line depreciation: the asset is depreciated by the same amount each year
- Accelerated depreciation: the asset is depreciated more heavily in the early years and less heavily in later years
- Double-declining balance: the asset is depreciated at twice the rate of straight-line depreciation
What is Depletion?
Depletion is the reduction in value of natural resources such as oil, gas, minerals, and timber over time due to their extraction and use. It is also a non-cash expense that is recorded on the income statement to reflect the decrease in the resource's value.
Types of Depletion
- Percentage depletion: a fixed percentage of the gross income from the resource is deducted as depletion
- Cost depletion: the cost of acquiring the resource is allocated over the estimated recoverable units of the resource
- Depletion allowance: a tax deduction allowed to owners of natural resources to compensate for the depletion of the resource
Differences between Depreciation and Depletion
- Depreciation applies to tangible assets, while depletion applies to natural resources.
- Depreciation is caused by wear and tear, obsolescence, or other factors, while depletion is caused by extraction and use of natural resources.
- Depreciation is calculated based on the cost of the asset, while depletion is calculated based on the cost of acquiring the resource.
- Depreciation is recorded as an expense on the income statement, while depletion is recorded as a deduction from revenue.
Conclusion
Depreciation and depletion are two important accounting concepts that businesses use to reflect the reduction in value of assets over time. While they may seem similar, they have different applications, calculations, and recording methods. Understanding the differences between the two concepts is essential for accurate financial reporting and decision-making.
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What is difference between depreciation and depletion for CA Foundation 2024 is part of CA Foundation preparation. The Question and answers have been prepared according to the CA Foundation exam syllabus. Information about What is difference between depreciation and depletion covers all topics & solutions for CA Foundation 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for What is difference between depreciation and depletion.
What is difference between depreciation and depletion for CA Foundation 2024 is part of CA Foundation preparation. The Question and answers have been prepared according to the CA Foundation exam syllabus. Information about What is difference between depreciation and depletion covers all topics & solutions for CA Foundation 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for What is difference between depreciation and depletion.
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