Differences Between Depreciation and Depletion

B

Depletion expenses also conform with accrual accounting.

The correct answer is A. II & III.

Depreciation and depletion are both accounting concepts used to allocate the cost of assets over their useful lives, but they are applied to different types of resources and follow different accounting principles. Let's break down each statement to understand the differences:

I. Depletion can be applied only to natural resources while depreciation can be applied to most production resources. This statement is true. Depletion is specifically used to allocate the cost of natural resources, such as oil, gas, minerals, or timber, that are physically consumed or depleted over time. On the other hand, depreciation is used to allocate the cost of various production resources, including tangible assets like buildings, machinery, and equipment, as well as intangible assets like patents or copyrights.

II. The amount of depletion depends upon total production but the amount of depreciation need not be so dependent. This statement is true. Depletion expenses are directly linked to the amount of natural resource extracted or used up in production. As more of the resource is produced or extracted, the depletion expense increases. In contrast, depreciation does not necessarily depend on production levels. Depreciation is based on the cost of the asset, its estimated useful life, and the chosen depreciation method (e.g., straight-line or accelerated). Changes in production levels typically do not impact the amount of depreciation expense.

III. Depreciation expenses conform with accrual accounting while depletion expenses conform with cost recovery accounting. This statement is true. Depreciation expenses are recognized over the useful life of an asset in accordance with accrual accounting principles. Accrual accounting matches expenses to the period in which the associated benefits are received or consumed, regardless of the timing of cash flows. On the other hand, depletion expenses follow cost recovery accounting principles. Cost recovery accounting focuses on recovering or expensing the cost of an asset based on its consumption or depletion rather than its useful life. Depletion is often used in industries where the natural resource is the primary revenue generator, and the objective is to recover the cost as the resource is extracted.

To summarize, the differences between depreciation and depletion are as follows:

I. Depletion is applicable to natural resources, while depreciation is applicable to most production resources. II. Depletion expenses are dependent on the total production or extraction of the resource, while depreciation expenses are not necessarily dependent on production levels. III. Depreciation follows accrual accounting principles, while depletion follows cost recovery accounting principles.

Therefore, the correct answer is A. II & III.