Question

(answer the question like an essay)

_ explain the theoretical accounting logics underlining the successful effort method and full cost method?

Answer 1

Full cost method -

The full cost method is an accounting method generally used in gas and oil industry. This method focusses on exploration costs, property acquisition and development costs that are aggregated into a nationwide cost pool. This capitalization occurs whether the venture it successful or not. The costs ascertain are thus charged to expenses using the production system, mentioned in the authenticated oil and gas reserves. If the expected cash flows from venture are expected to fall, due to decline in the market price or reduction in the reserves of the commodities, then the total cost pool associated with the venture may be impaired. If this is the case then the amount of the impairment will be charged to an expense. This method makes the venture susceptible to huge non-cash charges whenever the listed factors result in a decline in the expected cash flow. The need for periodic wreckage reviews also increases the accounting costs in this method.

Succesful efforts method -

The successful efforts method is also used in the oil and gas industry to cater certain operating expenses. venture only capitalizes the costs that are associated with the location of reserves and how & when those reserves have been found. If exploration costs are incurred and no new reserves are found, then such costs are charged to incurred expenses. Some costs may be capitalized as wells-in-progress until there is knowledge about the existence and if there are any future benefits/ When the additional information becomes available, the costs can be charged to expense or reconsidered as a fixed asset. This method is a conservative approach as it authorizes immediate charges of drilling a dry hole to expense. Through this process expense recognition is quickened, balancing the minimal amount of expenditures recorded as assets in the balance sheet.