Depreciation, Depletion, and Amortization (DD&A)
Candlefocus EditorDepreciation is the accounting technique used to gradually expense tangible assets. This expensing method is used to account for the cost of any asset that has been lost due to wear and tear or obsolescence. Examples of tangible assets for which depreciation is used include buildings, vehicles, equipment, and furniture. The amount of deprecation that is applied over time is based on the assumptions associated with the expected useful life of the asset and the appropriate method of depreciation.
Depletion is an accounting technique used to gradually expense the cost of extracting natural resources such as minerals, timber, and oil. This method is based on the concept of “uncorrelated reserve” and takes into account the cost of the estimated recoverable natural resources that remain in the ground. The annual cost of depletion is calculated by dividing the total estimated recoverable reserves by the estimated remaining useful life of the reserves.
Amortization is the accounting technique used to gradually expense the cost of intangible assets such as patents, copyrights, and goodwill. This method is based on the concept of “unexpired costs” and takes into account the cost of the annual amortization of an intangible asset that has been amortized over a period of time. Amortization is usually calculated by dividing the total amortizable amount by the number of years over which the amortization will occur.
In conclusion, DD&A are effective accounting techniques that enable business to gradually expense resources that have substantial economic value. By understanding and appropriately applying these techniques, businesses can more accurately track the cost of their investments and resources.