How should depletion on natural resources be computed according to U.S. GAAP?

Depletion on natural resources, according to U.S. GAAP, should be computed using a combination of extraction costs, land purchase price, and restoration costs. This method ensures that the depletion expense accurately reflects the total investment made in acquiring and preparing the resource for extraction, as well as restoring the land after extraction is complete.

When calculating depletion, it is important to consider all costs associated with the resource, not just a single component. Extraction costs encompass the expenses incurred to physically remove the resource from its location, while the land purchase price represents the initial outlay for acquiring the property where the resources are located. Additionally, restoration costs are crucial because they account for the future obligations related to returning the land to its original state or complying with environmental regulations post-extraction.

By incorporating all three elements—extraction costs, land purchase price, and restoration costs—companies can accurately determine the total cost of the resource and subsequently allocate this cost over the resource's useful life, reflecting the consumption of the natural asset in financial statements. This comprehensive approach is aligned with the matching principle in accounting, which seeks to match expenses with the revenues generated from those expenses.