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Simple English definitions for legal terms
depletion reserve
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A quick definition of depletion reserve:
A depletion reserve is an accounting term used to describe the reduction in value of a resource that is being used up over time, such as an oil reserve. This reduction in value is reflected as a charge to income. Essentially, it is like setting aside money to account for the fact that the resource will eventually run out and become less valuable.
A more thorough explanation:
A depletion reserve is an accounting term used to describe a charge to income that reflects the decrease in the value of a wasting asset. This type of asset is one that is used up over time, such as an oil reserve.
For example, let's say a company owns an oil reserve that is estimated to contain 1 million barrels of oil. Each year, the company extracts and sells 100,000 barrels of oil. As a result, the value of the oil reserve decreases each year. To account for this decrease in value, the company would create a depletion reserve and charge it to their income statement.
Another example of a wasting asset could be a timber forest. As trees are harvested and sold, the value of the forest decreases. A depletion reserve would be created to account for this decrease in value.
In summary, a depletion reserve is a way for companies to account for the decrease in value of a wasting asset over time.