Oil & Gas Industry: Accounting for Production Cost

In the Oil and Gas industry one of the common related cost is Production Cost.  Theoretically, the production cost are part of oil and gas produced and, therefore, allocable to inventory and cost of goods sold.  However, crude oil and natural gas inventories are usually insignificant and not recognized on E&P company balance sheets.

​In accounting for production costs, one of the first requirements is to determine the functional accounts that will be used.  The accounting system must provide information in sufficient detail to permit accounting cost in accordance with recognized accounting principles and at the same time meet the needs of operating personnel in evaluating operations. 

​In accounting for production costs, it is also essential that the accounting records furnish the necessary data for federal income tax purposes.  Production cost are expensed as incurred except in two cases:

1. ​Recording oil and gas inventory at cost and
2. Accrual or deferral of production cost associated with gas imbalances using the sales method of accounting​

​Accounting for production expenses is key to financial reporting and other groups such as Revenue who may be responsible to accurately allocating cost. 

​Fontenot & Associates Solutions has the skills and knowledge to support companies establish policies and procedures with extensive detail and definitions.  Visit our website today.

Source:PetroleumAccounting