Consumption of fixed capital

Imagine you have a bicycle that you love to ride every day. But over time, the bike starts to wear out and some parts need to be replaced. For example, the brakes might start to squeak, requiring new brake pads, or the tires might become flat, requiring new tyres. This is kind of like the consumption of fixed capital.

Businesses also have assets (things they own and use to make money) that wear out and need to be replaced, like machines, buildings, and equipment. And just like your bike, they lose value over time because of wear and tear, age, and obsolescence (when a new and better thing comes along).

The cost of replacing these worn-out assets is called depreciation, and it's a way of accounting for the decrease in value of these assets over time. Depreciation is calculated by dividing the cost of the asset by its useful life (how long it's expected to last) and charging a portion of the cost against profits each year. This is kind of like setting aside some money each year for when you'll need to replace your bike, rather than having to pay for everything all at once.

So, consumption of fixed capital is the way that businesses account for the decrease in value of their assets over time due to wear and tear, age, and obsolescence. By accounting for this decrease in value over time, businesses can make sure they have enough money to replace their assets when they need to, and they can accurately report their profits to investors and regulators.