Why is depreciation called consumption of fixed capital?
Answer and explanation
Correct answer: Because fixed capital wears out with use and time
Fixed capital such as machines, equipment and buildings is repeatedly used in production. Physical wear, ageing, time and obsolescence gradually consume part of its productive service capacity. National accounting calls this loss ‘consumption of fixed capital’, commonly measured as depreciation. It does not mean household consumption, wage payment or export growth; it refers specifically to capital used up in production.
Frequently asked questions
What is the correct answer to this question?
Because fixed capital wears out with use and time
Why is this the correct answer?
Fixed capital such as machines, equipment and buildings is repeatedly used in production. Physical wear, ageing, time and obsolescence gradually consume part of its productive service capacity. National accounting calls this loss ‘consumption of fixed capital’, commonly measured as depreciation. It does not mean household consumption, wage payment or export growth; it refers specifically to capital used up in production.
Which subject and chapter does this question cover?
This is a Class 11 Accountancy question. Chapter: Depreciation, Provisions, and Reserves.
