Accounting Question: Why do you amortize a natural resource based on the units extracted or sold?

Question by Bubbles: Accounting Question: Why do you amortize a natural resource based on the units extracted or sold?
I know that when calculating amortization for natural resources, you use the units of activity method. I am, however, very confused with the reason why. I could understand using this method of amortization for a vehicles or equipment because these capital assets depreciate with units of usage (e.g. kilometers driven or hours used). But how does this make sense with natural resources?

Any help is greatly appreciated! Thanks in advance!

Best answer:

Answer by Happy2Help
Using units of activity makes the most senses because you can only extract a certain amount of resources and each resource is exactly the same.

Say you have 1,000,000 barrels of oil. You might take out 200,000 the first year, 100,000 the second and 400,000 the third.

Straight-line would not match this very well.

What do you think? Answer below!




2 Responses to “Accounting Question: Why do you amortize a natural resource based on the units extracted or sold?”

  1. KlemKiddleHopper says:

    Simply because this establishes the “depletion rate” for natural resources

  2. MannyHosea says:

    We do not use the term DEPRECIATION in amortizing Natural Resources like oil, gold, minerals etc..We use DEPLETION. Depletion is used when there is a Actual Physical reduction of Asset within the regular course of business. While Depreciation applies to the allocation of cost of an asset to each period it is used. The actual quantities sold define the actual quantity depleted from the reserve. Hope you got the difference.