when the costs associated with natural resource extraction have been capitalized the expenses are systematically allocated across different time periods based upon the resources extracted the costs are held on the balance sheet until expense recognition occurs 
recording depletionto calculate what expenses need to be spread out for the use of natural resources each different phase of production must be taken into consideration the depletion base is the capitalized costs depleted across multiple accounting periods there are four main factors that affect the depletion base percentage depletion methodone method of calculating depletion expense is the percentage depletion method it assigns a fixed percentage to gross revenue sales minus costs to allocate expenses for example if 10 million of oil is extracted and the fixed percentage is 15 1 5 million of capitalized costs to extract the natural resource are depleted the percentage depletion method requires a lot of estimates and is therefore not a heavily relied upon or accepted method of depletion cost depletion methodthe second method of calculating depletion is the cost depletion method cost depletion is calculated by taking the property s basis total recoverable reserves and number of units sold into account the property s basis is distributed among the total number of recoverable units as natural resources are extracted they are counted and taken out from the property s basis for example the capitalized costs of 1 million yields 500 000 barrels of oil in the first year if 100 000 barrels of oil are extracted the depletion expense for the period is 200 000 100 000 barrels 1 000 000 500 000 barrels reporting requirementsthe internal revenue service irs requires the cost method to be used with timber 1 it requires the method that yields the highest deduction to be used with mineral property which it defines as oil and gas wells mines and other natural deposits including geothermal deposits 2 because the percentage depletion looks at the property s gross income and taxable income limit as opposed to the amount of the natural resource extracted it is not an acceptable reporting method for certain natural resources 