What is the process of allocating the cost of natural resources to expense as they are used?

• A. Depletion
• B. Accrual
• C. Amortization
• D. Depreciation

Answer: (A)

Verified step by step guidance

1. Understand the concept: Allocating the cost of natural resources to expense as they are used is referred to as 'Depletion.' This term is specific to natural resources such as oil, gas, minerals, and timber.
2. Recognize the difference between related terms: 'Depreciation' applies to tangible fixed assets like machinery and buildings, 'Amortization' applies to intangible assets like patents and copyrights, and 'Accrual' refers to the recognition of revenues and expenses when they are incurred, not when cash is exchanged.
3. Learn the formula for depletion: The depletion expense is calculated using the formula: \( \text{Depletion Expense} = \frac{\text{Cost of Natural Resource} - \text{Residual Value}}{\text{Estimated Total Units}} \times \text{Units Extracted} \).
4. Apply the formula: To allocate the cost of natural resources, determine the total cost, subtract any residual value, divide by the estimated total units of the resource, and multiply by the units extracted during the period.
5. Review the accounting treatment: Record the depletion expense in the financial statements by debiting the depletion expense account and crediting the accumulated depletion account, which reduces the book value of the natural resource.