Depletion is an accounting method used to allocate the cost of natural resources — such as oil and gas reserves, mineral deposits, coal mines, timber, and quarries — over the period during which those resources are extracted and consumed, in proportion to the quantity of the resource removed relative to the total estimated recoverable reserves. It is the natural resources equivalent of depreciation (for tangible fixed assets) and amortisation (for intangible assets). The unit-of-production method is the most widely used depletion method, calculating a per-unit depletion rate by dividing the depletable cost base by total estimated recoverable units, then multiplying by the actual units extracted in the period. Depletion reduces the carrying value of the natural resource asset on the balance sheet and flows through the income statement as a non-cash charge (similar to depreciation). For investors on Ventura Securities analysing Indian companies in oil and gas (ONGC, Oil India), mining (Coal India, Vedanta), and natural resource sectors, understanding depletion accounting is essential for correctly interpreting earnings quality, distinguishing non-cash charges from cash costs, estimating reserve life, and assessing the long-term sustainability of production and profitability.
