ALSARHANI YAHYA1 Petroleum Accounting CH (1)

Petroleum Accounting Learning Outcomes: Meaning and Definition of oil and mineral industry Meaning and Definition of oil and mineral industry Objectives of oil and mineral industry Objectives of oil and mineral industry Research and exploration Research and exploration Development of the fields and prepare for production. Development of the fields and prepare for production. ALSARHANI YAHYA2

3 The oil industry are a sequential series of activities associated with each other. The most important of these activities are : 1. Research and exploration. 2. The development of the fields and prepare for production. 3. The production of oil and gas. 4. Transfer of oil and gas. 5. Marketing. 6. Refining and processing petroleum.

Objectives of oil and mineral industry To exploit available natural resources in the country. To exploit available natural resources in the country. To raise revenue for the government. To raise revenue for the government. To engage in the business of extracting the resources. To engage in the business of extracting the resources. ALSARHANI YAHYA4

Objectives of oil and mineral industry To provide the benefits of the resources to the people in the form of goods and services. To provide the benefits of the resources to the people in the form of goods and services. To increase the standard of living of the people of the country To increase the standard of living of the people of the country ALSARHANI YAHYA5

6 The Accounting treatment for the petroleum companies Firstly: The Research and exploration. The allocation of the expenses of research and exploration in one of the following ways: The allocation of the expenses of research and exploration in one of the following ways: 1. Be regarded as spent (expenditures on research and exploration) revenues expenses: it appear in the profit and loss statement and it does not appear in the balance sheet and enrollment will be established as follows:

ALSARHANI YAHYA7 A) in the paid time Debit (The Research and exploration expenses) Debit (The Research and exploration expenses) Credit ( Cash) Credit ( Cash) B) In the last year the journal entries will be : Debit (The Profit and Loss statement) Debit (The Profit and Loss statement) Credit (The Research and exploration expenses) Credit (The Research and exploration expenses)

ALSARHANI YAHYA8 2) Or regarded as spent (expenditures on research and exploration) the capital expenses: it appear in the balance sheet and does not appear in the profit &lost statement The journal entries will be : The journal entries will be :

ALSARHANI YAHYA9 A) in the paid time Debit (The primary contracts) Debit (The primary contracts) Credit (Cash) Credit (Cash) 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 )

ALSARHANI YAHYA10 3) The resulting efforts: Under this method the expenditure spent on the productive areas as capital expenditures. The expenditure on non-productive areas is the ongoing expense (Revenue, periodical( which are appearing in the profit &lost statement. The journal entries will be:

ALSARHANI YAHYA11 A) in the paid time Debit (The primary contracts) Debit (The primary contracts) Credit (Cash) Credit (Cash) Note that :according to this method remains the account initial concession contracts are not commenting until the company found these area are production wells then the company will keep it or not production wells then the company will Left it

ALSARHANI YAHYA12 B) In the last year ( if all the wells are production area) the journal entries will be: Debit (The current contracts) Credit (The primary contracts) Credit (The primary contracts) and are not close in the profit & loss statement. In the last year ( if all the wells are non- production area) the journal entries will be : Debit (The transferor contracts) Credit (The primary contracts) Credit (The primary contracts)

ALSARHANI YAHYA13 In the last year ( if some of the wells are production area and the other are non-production area) the journal entries will be : Debit (The transferor contracts) Debit (The current contracts) Credit (The primary contracts) Credit (The primary contracts) Recording in the last year: Debit (profit &loss) Credit (The transferor contracts) Credit (The transferor contracts)

ALSARHANI YAHYA14 EXAMPLE If (NO WAY(petroleum company has got Obtained a preliminary license for oil exploration in the area of KM, when accessing the company paid a license fee to the Government 1,000,000 R.O. If (NO WAY(petroleum company has got Obtained a preliminary license for oil exploration in the area of KM, when accessing the company paid a license fee to the Government 1,000,000 R.O. What are the journal entries will be when: What are the journal entries will be when: 1. that the company will be transferred from the license terms if it found the absence of oil in the region ? 2. that the company obtained the concession for oil prospecting in the area of 4000 km 2 and waived the remaining 6000 km 2 ?

ALSARHANI YAHYA15 Answer 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 statement): The expenses are revenue expenses (so it appear in the profit & lost statement): In the paid time The Research and exploration expenses 1,000,000 Cash 1,000,000 Cash 1,000,000 In the last year: Profit & loss 1,000,000 Profit & loss 1,000,000 The Research and exploration expenses 1,000,000 The Research and exploration expenses 1,000,000

ALSARHANI YAHYA16 The second method The second method The expenses are capital expenses: The expenses are capital expenses: In the paid time The primary contracts 1,000,000 The primary contracts 1,000,000 Cash 1,000,000 Cash 1,000,000 In the last year: The current contracts 1,000,000 The current contracts 1,000,000 The primary contracts 1,000,000 The primary contracts 1,000,000

ALSARHANI YAHYA17 The third method The third method Producing areas is the cost of capital expenditure. Producing areas is the cost of capital expenditure. The cost of non-productive areas is the cost of revenue expenses which it appear in the profit & lost statement. The cost of non-productive areas is the cost of revenue expenses which it appear in the profit & lost statement. The Research and exploration expenses are distributed in two regions on the basis of size: The Research and exploration expenses are distributed in two regions on the basis of size:

ALSARHANI YAHYA18 The area production are capital expenses. The area production are capital expenses. The area non-production are revenue expenses and recording in profit& lost statement. The area non-production are revenue expenses and recording in profit& lost statement. The Research and exploration expenses distributed by the basis area The Research and exploration expenses distributed by the basis area The production area are 4000 km 2. The production area are 4000 km 2. The non-production area are 6000 km 2. The non-production area are 6000 km 2. The cost of research and exploration KM The cost of research and exploration KM

ALSARHANI YAHYA19 The cost of production area = 1,000,000 x (4000/10000) =400,000 The cost of production area = 1,000,000 x (4000/10000) =400,000 The cost of non - production area= 1,000,000 x (6000/10000) =600,000 The cost of non - production area= 1,000,000 x (6000/10000) =600,000 In the paid time: In the paid time: The primary contracts 1,000,000 cash 1,000,000 cash 1,000,000

ALSARHANI YAHYA20 Substitutes : Substitutes : 1. NON OIL in all area so the journal entry will be: The transferor contracts 1,000,000 The primary contracts 1,000,000 The profit &loss 1,000,000 The transferor contracts 1,000, Some area are production (cost 400,000) and the other not production area (cost 600,000) so the journal entries will be:

ALSARHANI YAHYA21 The transferor contracts 600,000 The current contracts 400,000 The primary contracts 1,000,000 The primary contracts 1,000,000 The cost for non production area closed in profit & lost, so the journal entry will be: The cost for non production area closed in profit & lost, so the journal entry will be: Profit & loss 600,000 Profit & loss 600,000 The transferor contracts 600,000 The transferor contracts 600,000

ALSARHANI YAHYA22 Example If (ABO Rashid (petroleum company has got Obtained a preliminary license for oil exploration in the area of 13,000 KM, when accessing the company paid a license fee to the Government 750,000 R.O. If (ABO Rashid (petroleum company has got Obtained a preliminary license for oil exploration in the area of 13,000 KM, when accessing the company 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. that the company will be transferred from the license terms if it found the absence of oil in the region ? 2. that the company obtained the concession for oil prospecting in the area of 6,000 km 2 and waived the remaining 8,000 km 2 ?