Final answer:
Businesses use percentage depletion when they sell a natural resource, deducting a fixed percentage of the gross sale income. Cost depletion is applied in the year they use or extract the natural resource, assigning a fixed cost to each unit based on total cost and estimated total units.
Step-by-step explanation:
Businesses calculate depletion to determine the cost of the natural resource that is used up during a period. There are two types of depletion methods used by businesses: percentage depletion and cost depletion. Percentage depletion is deducted when businesses sell the natural resource. Essentially, they calculate a fixed percentage of the gross income from the sale of the natural resources. On the other hand, cost depletion is deducted in the year they use or extract the natural resource. Cost depletion involves assigning a fixed cost to each unit of extracted resource based on the total cost of the resource divided by the estimated total units available.