Which term is used in the context of extraction of natural resources like mines, quarries, etc. that reduces the availability of the quantity of the material or asset?
Answer & explanation
Correct answer: option 4
The correct answer is option 4- Depletion.
The term depletion is used in the context of extraction of natural resources like mines, quarries, etc. that reduces the availability of the quantity of the material or asset. For example, if a business enterprise is into a mining business and purchases a coal mine for ₹10,00,000. Then the value of coal mine declines with the extraction of coal out of the mine. This decline in the value of mine is termed as depletion. The main difference between depletion and depreciation is that the former is concerned with the exhaustion of economic resources, but the latter relates to the usage of an asset. Despite this, the result is erosion in the volume of natural resources and expiry of the service potential. Therefore, depletion and depreciation are given similar accounting treatment.
OTHER OPTIONS-
- Amortisation refers to writing off the cost of intangible assets like patents, copyright, trademarks, franchises, goodwill which have utility for a specified period of time.
- Depreciation may be described as a permanent, continuing and gradual shrinkage in the book value of fixed assets. It is based on the cost of assets consumed in a business and not on its market value.
- Impairment refers to the reduction in the recoverable amount of a fixed asset below its carrying amount. Impairment is recognized when the carrying amount of an asset exceeds its recoverable amount.