The mineral deposits and gas reserves are recorded in the accounts through the:
- successful-efforts method
- full cost method.
How are exploration treated in accounting?
In accounting, the companies record exploration costs capitalized under either method on the balance sheet as part of their long-term assets because machinery used, oil and natural gas reserves are considered productive assets for an oil and gas company.
The accounting standard compels the oil companies to value their reserves by finding their net present value less extraction costs. There are two accounting methods for recording the costs associated with the exploration of oil or gas and that includes the:
- successful-efforts method
- full cost method.
Either of the choice "successful-efforts method" or "full cost method" are important because it can determine whether the costs are treated as expenses or if they can be capitalized.
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