ALSARHANI YAHYA1 Petroleum Accounting CH (1). Petroleum Accounting Learning Outcomes: Meaning and...

ALSARHANI YAHYAALSARHANI YAHYA 11

PetroleumPetroleum AccountingAccounting

CH (1)CH (1)

Petroleum AccountingPetroleum Accounting

Learning Outcomes:Learning Outcomes:

•Meaning and Definition of oil and Meaning and Definition of oil and mineral industrymineral industry

•Objectives of oil and mineral industryObjectives of oil and mineral industry

•Research and exploration Research and exploration

•Development of the fields and Development of the fields and prepare for production.prepare for production.



The oil industry are a sequential series of The oil industry are a sequential series of

activities associated with each otheractivities associated with each other..

The most important of these activities areThe most important of these activities are: : 1.1. Research and exploration.Research and exploration.2.2. The development of the fields and prepare for The development of the fields and prepare for

production. production. 3.3. The production of oil and gas. The production of oil and gas. 4.4. Transfer of oil and gas.Transfer of oil and gas.5.5. Marketing. Marketing. 6.6. Refining and processing petroleum.Refining and processing petroleum.

Objectives of oil and mineral Objectives of oil and mineral industryindustry

• To exploit available natural resources To exploit available natural resources in the country .in the country .

• To raise revenue for the government. To raise revenue for the government.

• To engage in the business of To engage in the business of extracting the resources.extracting the resources.


Objectives of oil and mineral Objectives of oil and mineral industryindustry

• To provide the benefits of the To provide the benefits of the resources to the people in the form resources to the people in the form of goods and services.of goods and services.

• To increase the standard of living of To increase the standard of living of the people of the countrythe people of the country



The Accounting treatment for the The Accounting treatment for the petroleum companiespetroleum companies

Firstly: The Research and exploration.Firstly: The Research and exploration.

• The allocation of the expenses of research and The allocation of the expenses of research and exploration in one of the following ways:exploration in one of the following ways:

1.1. Be regarded as spent (expenditures on research Be regarded as spent (expenditures on research and exploration) revenues expenses: it appear in and exploration) revenues expenses: it appear in the profit and loss statement and it does not the profit and loss statement and it does not appear in the balance sheet and enrollment will appear in the balance sheet and enrollment will be established as follows: be established as follows:


A) in the paid timeA) in the paid time

DebitDebit (The Research and exploration expenses)(The Research and exploration expenses)

Credit ( Cash)Credit ( Cash)

B) In the last year the journal entries will be :B) In the last year the journal entries will be :

DebitDebit (The Profit and Loss statement)(The Profit and Loss statement)

Credit (The Research and exploration expenses)Credit (The Research and exploration expenses)


2) Or regarded as spent (expenditures on 2) Or regarded as spent (expenditures on research and exploration) the capital research and exploration) the capital expenses: expenses: it appear in the balance sheet and does not it appear in the balance sheet and does not appear in the profit &lost statement appear in the profit &lost statement

• The journal entries will be :The journal entries will be :



Debit (The primary contracts)Debit (The primary contracts)

Credit (Cash)Credit (Cash)

B) In the last year the journal entries will be :B) In the last year the journal entries will be :

Debit (The current contracts)Debit (The current contracts)

Credit (The primary contracts )Credit (The primary contracts )


3) The resulting efforts3) The resulting efforts: : Under this method the expenditure spent on Under this method the expenditure spent on the productive areas as capital expendituresthe productive areas as capital expenditures. . The expenditure on non-productive areas is The expenditure on non-productive areas is the ongoing expense (Revenue, periodicalthe ongoing expense (Revenue, periodical(( which are appearing in the profit &lost which are appearing in the profit &lost statement .statement .

The journal entries will be:The journal entries will be:



Debit (The primary contracts)Debit (The primary contracts)

Credit (Cash)Credit (Cash)

Note that :according to this method remains the Note that :according to this method remains the

account initial concession contracts are not account initial concession contracts are not

commenting until the company found these area are commenting until the company found these area are

production wells then the company will keep it or production wells then the company will keep it or

not production wells then the company will Left itnot production wells then the company will Left it


B) In the last year ( if all the wells are production B) In the last year ( if all the wells are production

area) the journal entries will be:area) the journal entries will be:

Debit (The current contracts) Debit (The current contracts)

Credit (The primary contracts)Credit (The primary contracts)

and are not close in the profit & loss statement.and are not close in the profit & loss statement.

In the last year ( if all the wells are non- production In the last year ( if all the wells are non- production

area) the journal entries will be :area) the journal entries will be :

Debit (The transferor contracts)Debit (The transferor contracts)



In the last year ( if some of the wells are production In the last year ( if some of the wells are production

area and the other are non-production area) the area and the other are non-production area) the

journal entries will be :journal entries will be :

Debit (The transferor contracts)Debit (The transferor contracts)

Debit (The current contracts)Debit (The current contracts)


Recording in the last year:Recording in the last year:

Debit (profit &loss)Debit (profit &loss)

Credit (The transferor contracts)Credit (The transferor contracts)


EXAMPLEEXAMPLE• If (NO WAYIf (NO WAY((petroleum company has got petroleum company has got

Obtained a preliminary license for oil Obtained a preliminary license for oil exploration in the area of 10000 KM, when exploration in the area of 10000 KM, when accessing the company paid a license fee to the accessing the company paid a license fee to the Government 1,000,000 R.O.Government 1,000,000 R.O.

• What are the journal entries will be when:What are the journal entries will be when:1.1. that the company will be transferred from the that the company will be transferred from the

license terms if it found the absence of oil in the license terms if it found the absence of oil in the regionregion ??

2.2. that the company obtained the concession for oil that the company obtained the concession for oil prospecting in the area of 4000 km 2 and waived prospecting in the area of 4000 km 2 and waived the remaining 6000 km 2 ?the remaining 6000 km 2 ?


AnswerAnswer• 1 & 2 belong to the third method (The resulting efforts).1 & 2 belong to the third method (The resulting efforts).

• The first method The first method

• The expenses are revenue expenses (so it appear in the profit & lost The expenses are revenue expenses (so it appear in the profit & lost statement):statement):

In the paid timeIn the paid time

The Research and exploration expenses 1,000,000The Research and exploration expenses 1,000,000

Cash 1,000,000Cash 1,000,000

In the last year:In the last year:

Profit & loss 1,000,000Profit & loss 1,000,000

The Research and exploration expenses 1,000,000The Research and exploration expenses 1,000,000


• The second method The second method • The expenses are capital expenses:The expenses are capital expenses:In the paid timeIn the paid time The primary contracts 1,000,000The primary contracts 1,000,000 Cash 1,000,000 Cash 1,000,000 In the last year:In the last year: The current contracts 1,000,000 The current contracts 1,000,000 The primary contractsThe primary contracts 1,000,000 1,000,000


• The third methodThe third method• Producing areas is the cost of capital Producing areas is the cost of capital

expenditure.expenditure.• The cost of non-productive areas is the cost The cost of non-productive areas is the cost

of revenue expenses which it appear in the of revenue expenses which it appear in the profit & lost statement.profit & lost statement.

• The Research and exploration expenses are The Research and exploration expenses are distributed in two regions on the basis of distributed in two regions on the basis of size: size:


• The area production are The area production are capital expenses.capital expenses.

• The area non-production are The area non-production are revenue expensesrevenue expenses and recording in profit& lost statement.and recording in profit& lost statement.

• The Research and exploration expenses The Research and exploration expenses distributed by the basis areadistributed by the basis area

• The production area are 4000 kmThe production area are 4000 km22..

• The non-production area are 6000 kmThe non-production area are 6000 km22..

• The cost of research and exploration The cost of research and exploration 10000 KM10000 KM


• The cost of production area = 1,000,000The cost of production area = 1,000,000 x x (4000/10000) =400,000(4000/10000) =400,000

• The cost of non - production area= 1,000,000 x The cost of non - production area= 1,000,000 x (6000/10000) =600,000(6000/10000) =600,000

• In the paid time:In the paid time:

The primary contracts 1,000,000The primary contracts 1,000,000

cash 1,000,000cash 1,000,000


• Substitutes :Substitutes :1.1. NON OIL in all area so the journal entry will NON OIL in all area so the journal entry will

be: be: The transferor contracts 1,000,000 The transferor contracts 1,000,000 The primary contracts 1,000,000 The primary contracts 1,000,000 The profit &loss 1,000,000 The profit &loss 1,000,000 The transferor contracts 1,000,000The transferor contracts 1,000,000

2.2. Some area are production (cost 400,000) and the Some area are production (cost 400,000) and the other not production area (cost 600,000) so the other not production area (cost 600,000) so the journal entries will be:journal entries will be:


The transferor contracts 600,000The transferor contracts 600,000

The current contracts 400,000The current contracts 400,000

The primary contracts 1,000,000The primary contracts 1,000,000

• The cost for non production area closed in profit The cost for non production area closed in profit & lost , so the journal entry will be:& lost , so the journal entry will be:

• Profit & loss 600,000Profit & loss 600,000

The transferor contracts 600,000The transferor contracts 600,000


ExampleExample

• If (ABO Rashid If (ABO Rashid ((petroleum company has got petroleum company has got Obtained a preliminary license for oil exploration in Obtained a preliminary license for oil exploration in the area of 13,000 KM, when accessing the company the area of 13,000 KM, when accessing the company paid a license fee to the Government 750,000 R.O.paid a license fee to the Government 750,000 R.O.

• What are the journal entries will be when:What are the journal entries will be when:

1.1. that the company will be transferred from the license that the company will be transferred from the license terms if it found the absence of oil in the regionterms if it found the absence of oil in the region ??

2.2. that the company obtained the concession for oil that the company obtained the concession for oil prospecting in the area of 6,000 km 2 and waived the prospecting in the area of 6,000 km 2 and waived the remaining 8,000 km 2 ?remaining 8,000 km 2 ?

ALSARHANI YAHYA1 Petroleum Accounting CH (1). Petroleum Accounting Learning Outcomes: Meaning and...

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