Full Cost Method
Full cost method of accounting is an accounting system that is used by the companies dealing in with the trading of crude oil and natural gas. There are two methods for accounting used for these natural commodities one is the full cost method and the other is the successful efforts method. In full cost method the exploration, acquisition and the development activities related to natural gas and crude oil are capitalized. The operating expense regarding the exploration for these commodities is same and successful or unsuccessful exploration has no affect on the operating expense involve in conducting the exploration. On the other hand in successful effort method only those attempts are capitalized that yield a successful result.
The full cost method helps the companies dealing in the exploration of oil and gas to prepare a transparent report of their efforts regarding the exploration of these commodities. These reports are analyzed and scrutinized by Financial Accounting Standard Board and the Securities and Exchange Commission.
Most of the companies dealing with these commodities prefer full cost method of accounting as it makes the earnings less volatile as compared to the other method. After capitalizing the costs the management amortizes the costs into their expense regarding the reserve of oil and gas that are produced. The major expense associated with the companies involved in exploration is called exploration fees that involves the cost of equipment, cost of securing the land or mine that is to be explored, expense of hiring labor and other associated expense.