 Hello and welcome to the session. This is Professor Farhad and the session we would look at natural resources covered in a financial accounting introductory course. This topic is covered on the CPA exam. If this recording doesn't go in depth to what you need, please visit my intermediate accounting as I do cover this session in a more depth in my intermediate accounting course. Please note this is an introductory accounting course. As always, I would like to remind you to connect with me on LinkedIn. If you haven't done so, YouTube is where you would need to subscribe. I have 1600 plus accounting, auditing, finance and tax lectures. This is a list of all the courses that I cover. If you like my recording, please click on the like button, share them, put them in playlist, subscribe to the channel and connect with me on Instagram. On my website, you will find additional resources. If you are looking to supplement your accounting education or if you are studying for your CPA exam and you're looking for those extra 7 to 10 points to get over 75. Please check out my website. When you think of natural resources, I want you to think of those pictures in front of you, which is timber, oil, coal, gold, silver. Those assets, they are renewed naturally. So it's either by nature or some in some textbook, you'd say they are renewed by the act of God or just naturally they are renewable. You don't need oil, the planet basically produce oils. You don't need to produce it. You just need to extract it. Those are the assets that we're looking at in this session, natural resources. So what do we have to worry about or what do we have? What are we concerned with? First of all, concern about cost. So when we acquire a natural resource, well, we're going to have to determine the cost. What is the cost of that natural resource? So if you buy a piece of land and that land has oil, well, we either lease the land or buy the land, whatever we do, we're going to have to pay a cost. What's determined in that cost? What's included in that cost? Then the cost, just like the cost for property, plant and equipment is allocated over the period benefit. This process we call depletion expense rather than, rather than, you guessed it, rather than depreciation. So this, so allocating the cost to expense. So taking the cost, which is an asset allocated to an expense, the process for natural resources is called depletion. Start with D, but the word is depletion. So what you do is you extract the natural resources, you extracted it from the natural environment and report the asset at cost less accumulated depletion. Just like we have accumulated depreciation. So once you have the cost, what you do is you start to allocate the cost on expense through expense and accumulated depletion. Examples of natural resources, oil, coal, gold, silver, diamond, so on and so forth. So let's take a look at the cost first. So the cost, a mineral deposit with an estimated 250,000 ton of available ore is purchased for half a million and we expect the salvage value of zero. So this is the cost. Now, 250,000 is the production capacity, production capacity. Okay, so notice here it stands if you have oil, it's a per barrel, if you have gold, it's per ounce. So this is the production capacity of this asset, 250,000 tons. Now what we need to do, we need to record the purchase. So let's assume we paid half a million, we debit mineral deposit half a million credit cash. So this is when we acquire. So this is the cost. Now, the cost could be a little bit more complicated. In other words, in advanced accounting, what's determined in that cost could be a little bit more involved. But for our purposes, we keep it simple because this is a financial accounting course. Now after we determine the cost, we have to expense the cost. Expense means taking the cost and allocating it over a period of time and we do so not by time for depletion, we do so by the production. So if you remember the units of production, what we do is we take the cost, which is half a million minus the salvage value happens to be zero divided by the total production capacity and unit, 250,000 tons. We determine the depletion per unit. So we're going to deplete this mineral deposit at $2 per ton. Now all we have to find out is how many tons we extracted and sold in that period. Let's assume we extracted and sold. Notice extracted and sold. We extracted it and we sold it. 85,000 tons. We take $2, which is the depletion per unit times 85,000 tons equal to 170,000. This is our expense. Therefore, we debit depletion expense, 170,000. We credit accumulated depletion, 170,000. So notice we expense the whole thing because we extracted and we sold the whole thing. On the balance sheet, this is what things would look like. The mineral deposit at cost will be reported at half a million minus, notice less, less, 170,000. Of so far accumulated depreciation. This is basically the book or carrying value of the mineral deposit that's left. So let's assume we did not sell everything. Let's assume we extracted 170,000 and we have 30,000 tons remain. We still credit accumulated depreciation, 170,000. We only expense the amount that we sold because if we did not sell it, we cannot expense it. So what do we do with the difference, the 30,000? The difference sits on the balance sheet as an asset, inventory or inventory. So if we don't sell it, if we don't sell it, we don't expense it. If we don't sell it, it's an asset. So simply put your manufacture something. If you manufacture something, you don't expense it until you sell it, right? Because you match the cost with the sale. Same thing with natural resources. If you extract them, if you sell them, you expense them. Now, when you extract oil, what you do because there's a readily available market and readily available buyers, you could expense immediately based on the market price of that day. Same thing with the coffee, same thing with gold because there's an active market. But the point is, if you don't sell it, you can't expense it. If you don't expense something, now you have 30,000 tons of ore sitting in your warehouse or whatever you put them in your land, ready to be sold. Also, what we have to worry about when we deal with natural resources is the plant asset that are tied into extracting those resources. What am I talking about here? It's better to look at a picture to see what we're talking about here. For example, you need those equipment. You need equipment that are tied. For example, you need this vehicle. I don't have any asset for the timber, but you guys get the point. So there are certain plant assets that are tied. They exist to serve or to extract those natural resources. They're called specialized, those are specialized asset. Specialized plant asset may be required to extract natural resources. Those assets are recorded in a separate account and depreciated. Again here, we can go a little bit further into this topic, certain assets, they are, when we build them, for example, if we are extracting something from the land, we might have to build a tunnel. That tunnel, once it's built, it cannot be moved to another place. Well, versus if we bought a truck, that's those large vehicles, well, we can move it from one location to another. But if we build a tunnel inside the land, that tunnel will be connected to the land. So how do we deal with those different assets will be covered much more in intermediate accounting, which is beyond the scope of this course. But the general rule is, if the asset is movable, movable means think of a bulldozer, those large bulldozers. If you bought the bulldozer for one extraction and you extracted all the ore, then you can move it to another location. Then it's a movable, it's a separate asset. But if you bought something and you connected that something, whatever it is, to the land, then it's not movable. Then it has to be part of that, only part of that project. But again, it's beyond the scope of this course. In the next session, we would look at intangible asset very quickly and cover the asset turnover. As always, I would like to remind you to like the recording if you like it, share it, subscribe to the channel. And if you're looking for additional resources, please visit my website, especially if you're studying for your CPA exam and you're trying to get those extra 7 to 10 points. Good luck and stay safe, especially during those coronavirus days.