Question

course: oil and gas accounting/chapter 2

I need simple and short answer

describe the development activities & production activities, state the differences between them and provide an example of journal entries of each one.

Answer 1

The companies have two methods to go with who are involved in the extraction of oil and gas. These methods are Successfull efforts method and full cost method. As going with them the successful efforts explains it with the name goes by the expenses will be applied only when the material has been explored successfully. Only those expenses will be mentioned in the financials which are actually occured and and successfully helped in the exploration of the resources. And on the contrary as the word goes Full cost method in this method all the expenses are to be recorded whether the resource has been explored or not all the expenses has to be capitalized in the financials.

In this type of company there are two types of activities, Production Activity and Development Activity and both to be recorded in the financials. Development activities are the activities that can't be ignored and need to be recorded at any level becasue these are the activities that are meant to be because of their nature. Development activities includes the activities to create the expenses of production activities. If we want to extract oil then we need to develop the pipelines and well, these type of activiites includes development activities. Production activities are incurred only when the work is getting done. If the labour is working and extraction of oil is going on then the expenses incurred during this period will be production expenses.

For example Development Activity: a.) Work in Process (Inventory) Pipelines Dr. $1,000,000 To Salaries Payable $500,000 To Factories Overhead $500,000 b.) Raw material inventory Dr. $10,000 To Account Payable (purchased pipe from steel mill) $10,000 c.) Work in process inventory Dr. $10,000 To Raw material inventory (Transferred pipe in development) $10,000   d.) Finished good inventory Dr. $10,000 To work in process inventory (Transferred to finished goods) $10,000   e.) Cost of Goods Sold Dr. $10,000 To Finished goods inventory (Delivery of gas or oil ) $10,000