Natural resources are recorded on the books at their acquisition cost. The process of expense recognition for using natural resources is called depletion. Recall that depletion is allocation of a natural resource cost to expense in a rational and systematic manner over the resource useful life.

The units-of-production is the most common method to allocate the cost of natural resources. Suppose in 20X7 a mining company purchased a new mine for $6,700, plus real estate fees of $300 (totaling $7,000). No salvage value is expected. The mine is estimated to have approximately 14,000 tons of coal. So, the cost per ton is $0.5 (7,000 tons / $14,000). If the company extracts 4,000 tons in the first year, the depletion cost will be $2,000 (4,000 x $0.5). The depletion of a natural resource has the same effects on the accounting equation as depreciation of fixed assets has. Assets (Coal Mine) and equity (by increasing Depletion Expense) decrease.

Illustration 17: Effect of natural resources depletion on the horizontal model

The journal entries are shown below:

Illustration 18: Journal entries for mine acquisition and depletion expense

To show the decrease in assets, a contra asset account titled Allowance for Depletion could have been used instead of directly affecting the Coal Mine account. In such a case, Allowance for Depletion has the same relationship with natural recourses as Accumulated Depreciation has with property, plant, and equipment. Both decrease the historical cost of assets to their book value.